==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 82 ADMINISTRATIVE PROCEEDING FILE NO. 3-8511 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION : In the Matter of : : SHARON M. GRAHAM, : INITIAL DECISION STEPHEN C. VOSS, and : DECEMBER 28, 1995 JAMES J. PASZTOR : : APPEARANCES: David S. Horowitz and Mary Jo Gillette for the Division of Enforcement, Securities and Exchange Commission Ida Wurczinger Draim for Respondents Sharon M. Graham and Stephen C. Voss BEFORE: Glenn Robert Lawrence, Administrative Law Judge ==========================================START OF PAGE 2====== These public proceedings were instituted by an Order of the Securities and Exchange Commission dated September 30, 1994 (the Order), issued pursuant to Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act) to determine whether allegations of misconduct made by the Division of Enforcement (Division) against Respondents-[1]- Sharon M. Graham and Stephen C. Voss are true and what, if any, remedial action would be appropriate in the public interest. In substance, the Division alleged that over the period from January 1, 1989 to July 31, 1990 (the trading period), John G. Broumas, former chairman of the board of Madison National Bank of Virginia (Madison of Virginia) and a former director of James Madison Limited (JML) conducted a fraudulent market manipulation scheme in violation of Sections 9(a)(1), 9(a)(2), and 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Division alleges that from approximately January 23, 1989 to May 24, 1990, Respondent Graham willfully aided and abetted and caused Broumas's violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder by, among other things, entering orders for the purchase or sale of JML stock with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale or purchase of JML stock, had been or would ---------FOOTNOTES---------- -[1]-Respondent James J. Pasztor has submitted an Offer of Settlement in this proceeding which the Division has recommended that the Commission accept. However, the Commission has not yet acted upon the Settlement Offer. ==========================================START OF PAGE 3====== be entered by or for Broumas or another party and effected transactions in JML stock that involved no change in beneficial ownership.-[2]- Specifically, the Division alleges that Graham executed 60 wash trades or matched orders in JML stock. The Division further alleges that Respondent Graham was subject to the supervision of Respondent Voss, who failed to reasonably supervise Graham with a view to preventing her violations. By answers dated November 3, 1994, Voss and Graham largely denied the allegations in the Order. The findings and conclusions herein are based upon the preponderance of the evidence as determined from the record and upon my observation of the various witnesses that testified at the hearings that were held in Washington, D.C., from December 12 through 14, 1994, April 10 and 11, 1995, and July 21, 1995, as well as the briefs, arguments and proposals of facts and law of the parties and the relevant statutes and regulations. FINDINGS OF FACT AND CONCLUSIONS OF LAW The Commission filed a complaint in the U.S. District Court for the District of Columbia against Broumas on September 27, 1991.-[3]- It was alleged that from January 1989 through July 1990, Broumas violated the federal securities laws by ---------FOOTNOTES---------- -[2]-A trade of this nature that results in no change in beneficial ownership of the stock is referred to a wash sale; a trade of this nature where another party participates is referred to as a matched order. -[3]-SEC v. John G. Broumas, Civil Action No. 91-2449 (D.D.C.)(L.R. No. 12999). ==========================================START OF PAGE 4====== marking-the-close-[4]- and executing wash trades and matched orders in JML stock. Broumas consented, without admitting or denying the allegations, to the entry of a permanent injunction prohibiting him from future violations of Sections 9(a)(1), 9(a)(2), 10(b) and 16(a) of the Exchange Act and Rules 10b-5 and 16a-3 thereunder. Ex. 830.-[5]- Broumas's Manipulation Scheme In 1989 and 1990, JML Class A common stock was listed on the American Stock Exchange ("AMEX"). As of November 7, 1989, there were 6,490,126 shares of that stock outstanding. Officers and directors owned about 32%, leaving a float of approximately 4,413,200 shares. Officers and directors of JML also owned 37% of JML common stock, which was traded over-the-counter and was convertible into the Class A stock, share for share. Ex. 300 (8/17/90 memo); Dec. Tr. 347 (Savarese). Between January 1989 and January 1990, the price of JML Class A stock traded in a range between $5 5/8 and $7 1/2 (closing price), with most closing prices higher than $6 per share. In February 1990, the ---------FOOTNOTES---------- -[4]-Marking-the-close trades occur when stock is purchased at or near the end of the trading day on an uptick (i.e. a purchase executed for a price higher than the previously executed trade), in order to affect the closing price. Order at 2 n.2. -[5]-References to pages of the transcript of the hearing held in these matters on December 12, 13 and 14, 1994 are noted as "Dec. Tr. ( )," indicating parenthetically the witness whose testimony is cited. Similarly, references to pages of the transcript of the hearing held April 10 and 11, 1995, are noted as "Apr. Tr. ( )" and references to pages of the transcript of the hearing held on July 21, 1995, are noted as "July Tr. ( )." All references to the Division's Exhibits admitted into evidence at the hearing are indicated as "Ex. ." "RPFF" refers to Respondents' Proposed Findings of Fact. ==========================================START OF PAGE 5====== price declined, and fell to $2 1/2 per share on July 20, 1990. From March 16, 1990 through May 9, 1990, the closing price was between $5 and $5 1/2 per share. After May 9, 1990, it remained below $5 per share again. Ex. 306. On December 31, 1986, JML became owner of the McLean Bank, which changed its name to Madison National Bank of Virginia. Dec. Tr. 120-121 (Broumas). Broumas, a substantial stockholder in the McLean Bank, received a combination of stock and cash for his $6 million interest. Dec. Tr. 121-122 (Broumas). He stayed on as chairman of the board of Madison of Virginia until May 24, 1990, and a member of the board of JML, the holding company, until May 24, 1990. Dec. Tr. 122 (Broumas). Broumas obtained equal shares of both JML Class A and common stock. Dec. Tr. 122- 123 (Broumas). Broumas owned approximately 198,000 shares of JML Class A common stock on January 31, 1989, and on March 13, 1989, Broumas owned 193,268 shares or 2.98% of the total amount outstanding. Exs. 808, 300 (8/17/90 Memo, p. 6), 807. He was very wealthy, but suffered severe financial reverses early in 1989. Exs. 120 at 19, 34-36; 807 at 3. In October 1987, when the market crashed, Broumas held, mostly on margin, 225,000 shares of Syntec stock. After the crash, Syntec dropped from $16 to $4 per share, resulting in Broumas receiving margin calls on the stock. To meet those calls, he borrowed approximately $300,000 from Madison of Virginia. Dec. Tr. 123-25. On May 1, 1989, Broumas was personally liable on notes owed to banks in the amount of $2,733,064, and owed $904,000 in ==========================================START OF PAGE 6====== mortgages with payments of $128,008 per quarter. Ex. 801; Dec. Tr. 168-73 (Broumas). Many of his liquid assets were in the form of JML stock, both Class A and common, which were held in margin accounts. Dec. Tr. 173-74 (Broumas); Ex. 801. As of May 1, 1990, Broumas's bank loans totaled $2,621,981, with quarterly payment requirements of at least $104,500. Broumas was having difficulty meeting those interest and loan payments. In addition, the value of his real estate holdings was dropping. Exs. 801, 802; Dec. Tr. 175-176 (Broumas). As a result of these liabilities, among others which he could not repay, Broumas eventually filed for personal bankruptcy in February 1991. Dec. Tr. 214-15 (Broumas); Ex. 800. In November 1994, the United States Attorney for the District of Columbia filed an Information against Broumas charging him with one count of misapplication of funds by a bank officer in violation of 18 U.S.C.  656.-[6]- Ex. 706. The Information alleged a check-kiting scheme conducted by Broumas, using six separate bank accounts at three banks, including Madison of Virginia and Madison of Washington. The purpose of the scheme was to use the float generated by writing checks against accounts for which insufficient funds existed, and using the checks to meet stock margin calls for JML stock from April through June, 1990. On November 23, 1994, Broumas pled guilty to this Information and admitted to the conduct charged. Ex. 720; Dec. Tr. 209-12 (Broumas). ---------FOOTNOTES---------- -[6]-United States v. Broumas, Crim. No. 94-442 (D.D.C.). ==========================================START OF PAGE 7====== Broumas's Trading Activity During 1989 and 1990, Broumas controlled approximately 25 different brokerage accounts, in his own name and others, located at 14 different broker-dealers, through which he placed his wash trades, matched orders, and marking-the-close trades in JML Class A stock. Ex. 1. During 1989 and 1990, Broumas controlled three accounts at H. Beck, a joint account with his wife, and accounts in the name of Les Girls and BC Theatres. He controlled two brokerage accounts at Lara Millard, one jointly with his wife and BC Theatres. He controlled two accounts at Scott & Stringfellow, one in his name and the other jointly with his wife. Broumas controlled two accounts at Voss & Co., jointly with his wife and the other Les Girls. He controlled three accounts at First Potomac, jointly with his wife, Les Girls, and BC Theatres. Broumas controlled accounts jointly with his wife at Capitol Securities, City Securities Corporation, Investors Group, Ltd., Koonce Securities, and Titan Value Equities Group. Broumas had two accounts in his own name at Johnston Lemon. He controlled accounts in his name at Staib Roberts and Washington Investment Corp. He controlled three accounts at Swan Securities, jointly with his wife, BC Theatres, and Les Girls. He controlled three accounts at Carey Jamison Securities, jointly with his wife, BC Theatres, and Les Girls. Dec. Tr. 126-42 (Broumas). Broumas had sole authority to place trades, and he was the only person who traded in these accounts; he paid for them out of funds he controlled; and when shares were sold, he received ==========================================START OF PAGE 8====== payment. He had the power to control or direct the voting of the shares of JML stock in these accounts during 1989 and 1990. Dec. Tr. 126-42 (Broumas). In 1989 and 1990, Broumas held his JML Class A stock in margin accounts, and he received margin calls that he had to meet or risk sale of the stock. Dec. Tr. 186-89 (Broumas). Broumas believed that broker-dealers required that stock must have a value of $5 or more to be held on margin. Dec. Tr. 192 (Broumas). Eventually, Broumas received margin calls from his brokers that he could not meet, and all of his accounts that held JML Class A stock were sold out by the brokers. Dec. Tr. 212-13 (Broumas). In order to meet margin calls in 1989 and 1990, Broumas admitted that he sold JML stock to himself many times. He called brokers during that time period and asked them whether he had any equity in his margin accounts. Dec. Tr. 193 (Broumas). Then he would direct that shares be bought or sold from one account controlled by him into other accounts controlled by him. Dec. Tr. 193-94 (Broumas); Ex. 1. Between January 1, 1989, and June 30, 1990, Broumas ordered approximately 545 trades of JML Class A stock. Ex. 1. Of this amount, 420 trades constituted 203 sets of wash trade or matched order transactions. These trades typically involved the purchase and sale of between 3,000 and 12,000 shares of JML stock. Ex. 2. Broumas orchestrated these trades through at least 29 brokerage accounts that he maintained or controlled at 13 brokerage firms in the Washington, D.C. area. Ex. 2, 6. ==========================================START OF PAGE 9====== Broumas could not go to the JML banks and borrow cash because he had reached his limit. Dec. Tr. 201 (Broumas). He therefore arranged wash trades and matched orders for the purpose of obtaining a float in a scheme similar to check-kiting. Under this scheme, Broumas orchestrated trades between accounts he held at different brokerage firms by calling registered representatives on each side of his trades and giving them instructions to call each other and to trade a specific amount of his JML Class A stock at a specified price. Broumas knew that by calling both sides of the trades, the trades would be executed on the over-the-counter market. Once the trades were completed, Broumas obtained the proceeds from the sale side of the trade one day later, but waited until the settlement date at least one week later to pay for the corresponding buy side. When the settlement date arrived, he sometimes executed another set of wash trades or matched orders and repeated the process. By engaging in this activity, Broumas could, in effect, obtain a "loan" from the brokerage firms where he traded his JML stock. Similarly, Broumas arranged a smaller number of matched orders by following the same procedure, except that he solicited third parties, nominees, to call in one side of the trade. Dec. Tr. 195-201 (Broumas). Broumas was able to borrow cash by this method of selling shares to himself, and did this instead of selling JML stock to a buyer in the open market because he wanted to maintain his large ==========================================START OF PAGE 10====== holdings of JML stock "at that price."-[7]- It was important to him to maintain the same general level of JML stock ownership. Dec. Tr. 199-200 (Broumas). For each of the 203 transactions, Broumas made two phone calls, one to each broker on either side of each trade. Ex. 2. In instances where stock was moved to or from accounts that he controlled (John Broumas, John and Ruth Broumas, Les Girls or BC Theatres) to or from nominee accounts, the mechanics of how the calls were made and how the trade was executed was the same as when he moved stock between his own accounts. Dec. Tr. 202-203 (Broumas). In addition to his own accounts, Broumas also traded JML Class A stock through the accounts of four nominees: a business associate as well as three former Madison employees, one of whom was his grandson. The business associate, L. Lawton Rogers, is a respondent in one of the related Commission administrative proceeding. Admin. Proc. File No. 3-8513. The three former Madison employees are grandson Matthew Johnson, Michael Connolly, and Kevin Lemmon. Exs. 2, 6. Broumas initiated this arrangement with each nominee. During the trading period, Rogers maintained accounts at H. Beck, Voss & Co., and First Potomac which Broumas controlled. Exs. 120 at 14-15; 280; 281. Rogers ordered, at Broumas's request, 21 trades of JML stock through the above- mentioned accounts. The value of Rogers's trades in JML stock totaled approximately $1,060,000. Seventeen of the trades ---------FOOTNOTES---------- -[7]-This is considered a form of manipulation to avoid the price movements of the market place. ==========================================START OF PAGE 11====== amounted to matched orders, and the other four were two sets of trades that washed between Rogers's accounts. Exs. 2, 6. Broumas directed Rogers to call specific registered representatives and place a buy or sell order at a specific price for JML stock. Rogers then called in the trade, giving the registered representative the price, amount of shares, and to whom it was to be traded. Exs. 120 at 24-26, 30, 37-38; 282. On two occasions, Rogers placed wash trades between his own accounts. On January 25, 1990, Rogers sold 12,000 shares of JML stock at $6.375 per share from his H. Beck account, and bought 12,000 shares of JML stock at $6.375 per share for his First Potomac account. Similarly, on February 12, 1990, Rogers sold 12,000 shares of JML stock at $5.625 per share from his First Potomac account and bought 12,000 shares of JML stock at $5.625 per share for his Voss & Co. account. Ex. 2. Broumas also traded JML stock through nominee accounts in the names of Johnson, Connolly, and Lemmon. During the period from November 1989 to May 1990, Broumas placed 12 matched orders through Johnson's account at H. Beck. Exs. 2, 6. During the period from February 1989 to April 1989, Broumas placed four matched orders through an account Johnson maintained at Swan Securities. Exs. 2, 6; Dec. Tr. 252-53 (Johnson). Connolly was employed by Madison of Virginia during the relevant period as a vice president and cashier. In the fall of 1989, Broumas told Connolly that he was using these transactions to generate cash to pay maturing bank notes. Connolly understood ==========================================START OF PAGE 12====== that Broumas used these trades in his margin accounts to obtain a float, or use of the funds, for several days. Ex. 249. Connolly opened an account with Richard at H. Beck. Chema is a respondent in a related Commission proceeding. Admin. Proc. File No. 3- 8508. Although Connolly agreed to allow Broumas to conduct trades through Connolly's account, he never subsequently signed any documents giving Broumas authority to trade on his behalf, or had any dealings with the broker again. Dec. Tr. 269 (Connolly); Ex. 249. Between January 1990 and May 1990, Broumas placed nine matched orders in JML Class A stock through Connolly's H. Beck account. Lemmon was employed by Madison of Virginia during the trading period as a vice president in the lending department. Between December 1989 and May 1990, Lemmon maintained accounts at First Potomac and H. Beck through which he allowed Broumas to place 14 matched orders in JML Class A stock. Ex. 2, 6. None of Broumas's wash trades and matched orders placed between January 1, 1989 and July 2, 1989 were reported by the registered representatives and broker-dealers who executed Broumas's trades, in violation of the requirements of that National Association of Securities Dealers (NASD) Schedule G. Exs. 2, 4, 310. In addition, many trades after July 3, 1989 were not reported either, again in violation of NASD Schedule G. Exs. 2, 4. From January 1, 1989 to June 30, 1990, the trading period at issue, all of Broumas's reported trades constituted 40.3% of the ==========================================START OF PAGE 13====== total reported market volume for JML Class A stock. From July 1, 1989 to December 31, 1989, all of Broumas's reported trades constituted 55.3% of the total reported market volume for JML Class A stock during that time period. From July 1, 1989 to June 30, 1990, all of Broumas's reported trades constituted 48.2% of the total reported market volume for JML Class A stock during that time period. Exs. 8, 304, 306; Dec. Tr. 61-69 (Boeggeman). With regard to only the volume of Broumas's wash trades and matched orders reported, from January 1, 1989 to June 30, 1990, all of Broumas's reported wash trades and matched orders constituted 36.6% of the total reported market volume for JML Class A stock. From July 1, 1989 to December 31, 1989, all of Broumas's reported wash trades and matched orders constituted 53.5% of the total reported market volume for JML Class A stock during that time period. From July 1, 1989 to June 30, 1990, all of Broumas's reported wash trades and matched orders constituted 44.1% of the total reported market volume for JML Class A stock during that time period. Exs. 4, 8, 304, 306; Dec. Tr. 61-69 (Boeggeman). Finally, comparing the total volume of wash trades and matched orders reported with the total volume reported only on those days on which reported wash trades and matched orders occurred, from January 1, 1989 to June 30, 1990, Broumas's trades constituted 73.7% of the reported market volume for JML Class A stock. From July 1, 1989 to December 31, 1989, the applicable percentage is 72.4%. From July 1, 1989 to June 30, 1990, the ==========================================START OF PAGE 14====== percentage was 73.7%. Exs. 4, 8, 304, 306; Dec. Tr. 61-69 (Boeggeman). In an attempt to support the price of JML stock, Broumas also engaged in transactions to mark-the-close, "the practice of executing the last transaction of the day in a particular security in order to affect its closing price." Richard L. Warner, 53 SEC Docket 0377, 0379 (1992). Marking-the-close involves a series of transactions, at or near the close of the trading day, i.e., at or within minutes of 4:00 p.m., which either uptick or downtick a security. Dec. Tr. 342, 356 (Savarese). Marking-the-close represents a possible departure from the normal forces of supply and demand that result in the fair auction price for a security, and is of concern to those who regulate the markets. Dec. Tr. 356-357 (Savarese). Between January 18, 1989 and June 25, 1990, Broumas ordered 64 purchases that occurred within the final ten minutes of the trading day; of these, 54 constituted the last trade of the day; and 47 of these purchases were executed on an uptick. Exs. 3, 7; Dec. Tr. 208 (Broumas). In marking-the-close, registered representatives executed Broumas's purchases on either the AMEX or the Midwest Stock Exchange. By using the exchanges, Broumas could assure that his closing purchases would be reported by the exchanges, the reporting services, and the newspapers. He primarily placed his late-day purchases through accounts held at Scott & Stringfellow and H. Beck. Exs. 3, 7. He typically bought 100-200 shares of JML stock at or near the close of the ==========================================START OF PAGE 15====== trading day. On a number of occasions, his trades raised the closing price of JML stock by 1/8. Exs. 3, 7. During this time period, he followed the price of JML Class A stock daily in the newspaper. Dec. Tr. 207 (Broumas). Purchases at the close are especially significant for two reasons. First, brokerage firms use the closing price of a security to arrive at their margin calculations in determining what their margin requirements will be for customers. Generally, many firms require maintenance of equity of 35% in margin accounts. Some firms also use $5.00 per share as a level at which they raise margin requirements. Other firms use a lower price. When the stock price reaches that level, many firms raise their requirements in margin accounts to 100% equity, essentially requiring full cash payment for the security. Second, the closing price of a security is the price reflected in the newspapers as the final price for that security for that trading session. Dec. Tr. 357-359 (Savarese). The concern about marking-the-close arises when the practice is repeated, is ongoing, and develops into a pattern. Dec. Tr. 358 (Savarese). At some point, Adrian C. Havill, a respondent in a related Commission proceeding (Admin. Proc. File No. 3-8510), told Broumas that his office said that Havill could not take these uptick trades any longer. Havill told him the trading was not proper, and that it might affect the market. Dec. Tr. 207-8 (Broumas). Broumas conducted some of his marking-the-close trades through two accounts at Scott & Stringfellow, which he ==========================================START OF PAGE 16====== opened in late August 1989. Ex. 7; Dec. Tr. 288-89 (Havill). His purpose in conducting these marking-the-close trades was to create interest in the stock. He knew that if nobody bought the stock on a certain day, it would not show up in the newspaper listings the next day. Dec. Tr. 292-94 (Havill). At Scott & Stringfellow, in particular, Broumas would often call and execute trades near the end of the day. If the stock had not traded that day, he bought some shares just to make sure it traded. Dec. Tr. 295-96 (Havill). Broumas would call many times between 3:00 and 4:00 p.m. and instruct Havill, his registered representative at Scott & Stringfellow, to buy at or near the close. Dec. Tr. 300 (Havill). In 1990, AMEX conducted a study concerning certain trading activity in JML Class A stock, which was then traded on the AMEX. Dec. Tr. 341-42 (Savarese). The study was initiated by the AMEX Equities Surveillance Department in January 1990 when a Participant-at-the-Close Report, which highlights patterns of either upticks or downticks over a period of time in any security, showed a pattern of upticks at or near the close of trading for JML Class A stock. Dec. Tr. 341-42 (Savarese); Ex. 300. The Participant-at-the-Close Report had revealed that, on 9 out of 10 trading days from December 29, 1989 through January 12, 1990, JML closed on a plus or zero plus tick,-[8]- and that Scott & Stringfellow had effected the last purchase of the day on ---------FOOTNOTES---------- -[8]-A zero plus tick is a purchase executed for the same price as the previously executed trade where that trade was executed for a price higher than the immediately preceding trade. ==========================================START OF PAGE 17====== 8 of the 9 days. Seven of the 8 trades were executed in the last 5 minutes of trading. All of the firm's at-the-close purchases were for 100 shares and were done on plus or zero plus ticks. Ex. 300 (8/17/90 memo). The study was extended to encompass the time period August 30, 1989 through January 17, 1990. The study concluded that, of the 39 trading sessions during which Broumas was active at Scott & Stringfellow, he executed the last trade of the day on 32 occasions and the trade was effected on a 1/8 uptick on 27 occasions. Ex. 300 (8/17/90 memo). In September 1989, Broumas ordered 15 wash trade transactions, and 11 marking- the-close trades, 9 of which were on the same days as the wash trades. In December 1989, he ordered 11 wash trades or matched order transactions, and 9 marking-the-close trades, 4 of which were on the same days as the wash trades. The pattern continued throughout the trading period. Exs. 2, 3. Broumas's Violations Market manipulation refers generally to practices--such as wash sales, matched orders or rigged prices--that are intended to mislead investors by artificially affecting market activity. Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 6 (1985). Manipulation subverts the objectives of the Exchange Act which, among other things, are to "insure the maintenance of fair and honest markets," that is, "markets where prices may be established by the free and honest balancing of investment demand with investment supply." H.R. Rep. No. 1383, 73d Cong., 2nd Sess. (1934) at 11. Section 9(a)(2) of the Exchange Act, which ==========================================START OF PAGE 18====== prohibits the manipulation of securities listed for trading on a national exchange, makes it unlawful for a person to engage in a series of transactions that create actual or apparent activity or raise or depress a stock's price when done for the purpose of inducing others to buy or sell the security. Section 9(a)(2) was considered by Congress to be "the very heart" of the Exchange Act, and "its purpose was to `outlaw every device used to persuade the public that activity in a security is the reflection of a genuine demand instead of a mirage.'" Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 794 (2d Cir. 1969) (quoting 3 L. Loss, Securities Regulation 1549-55 (2d ed. 1961)), cert. denied, 400 U.S. 822 (1970). Section 9(a)(2) violations are established by a showing that an individual: 1) effected a series of transactions in a security registered on a national securities exchange; 2) which created actual or apparent active trading in such security, or raised or depressed the price of the security; 3) for the purpose of inducing the purchase or sale of the security by others. Crane at 794-795; Section 9(a)(2) of the Exchange Act. Section 9(a)(1) prohibits certain manipulative practices, including wash trades and matched orders, when such transactions are done for the purpose of creating the false or misleading appearance of active trading in a security listed on a national securities exchange, or a false or misleading appearance with respect to the market for any such security. To establish a violation of Section 9(a)(1), it must be shown, as it has been in ==========================================START OF PAGE 19====== this case, that one or more individuals effected a transaction in a "security registered on a national securities exchange ... which involve[d] no change in the beneficial ownership thereof, or ... with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties." Section 9(a)(1) of the Exchange Act. It also must be established, as it has in this matter, that the transaction was done "for the purpose of creating a false or misleading appearance of active trading in" such security, "or a false or misleading appearance with respect to the market" for any such security. Section 9(a)(1) of the Exchange Act; see Michael Batterman, 46 S.E.C. 304, 305 (1976). The manipulative activities expressly prohibited by Sections 9(a)(1) and 9(a)(2) of the Exchange Act with respect to a listed security constitute violations of Section 10(b) of the Exchange Act and Rule 10b-5 when such activities involve trading in the over-the-counter market. See, e.g., United States v. Charnay, 537 F.2d 341, 350-51 (9th Cir. 1976), cert. denied, 429 U.S. 1000 (1976); SEC v. Resch-Cassin & Co., Inc., 362 F. Supp. 964, 975 (S.D.N.Y. 1973); Edward J. Mawod & Co., 46 S.E.C. 865, 869-71 (1977), aff'd, Mawod & Co. v. SEC, 591 F.2d 588 (10th Cir. 1979); Batterman, 46 S.E.C. at 305; Russell Maguire & Co., Inc., 10 S.E.C. 332, 347-49 (1941). ==========================================START OF PAGE 20====== To establish that an individual has engaged in manipulative practices in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Division must prove, as it has done here, that one or more individuals engaged in any act, practice, or course of business which operated as a fraud or deceit upon any person in connection with the purchase or sale of a security. See SEC v. Kimmes, 799 F. Supp. 852, 858 (N.D.Ill. 1992). In establishing a violation of Section 10(b) and Rule 10b-5, the Commission must show that the individual acted with scienter. Aaron v. SEC, 446 U.S. 680, 701-02 (1980). "Rule 10b-5 . . . require[s] no additional proof of facts creating a higher burden of proof when compared to subsections 9(a)(1), (2) and (6). In fact, Rule 10b-5 create[s] a lower burden of proof." Chemetron Corp. v. Business Funds, Inc., 682 F.2d 1149, 1165 (5th Cir. 1982), reh'g denied, 689 F.2d 190 (5th Cir. 1982), vacated, remanded, 460 U.S. 1007 (1983), on remand, 718 F.2d 725, cert. denied, 460 U.S. 1013 (1983). The third element required under Section 9(a)(2)-- manipulative purpose--is not required to establish a violation of Section 10(b) and Rule 10b-5. Instead, "[i]t is sufficient for the person to engage in a course of business which operates as a fraud or deceit as to the nature of the market for the security." Batterman, 46 S.E.C. at 305; see also Charnay, 537 F.2d at 350- 51. Such deceit has been demonstrated in this case. From January 1, 1989 to June 30, 1990, Broumas repeatedly placed orders for wash trades and matched orders in JML Class A ==========================================START OF PAGE 21====== stock, which constitute manipulative practices in violation of Sections 9(a)(1) and 9(a)(2) of the Exchange Act. Furthermore, this pattern of conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because, by creating a false or misleading appearance of active trading in JML Class A stock, it operated as a fraud or deceit upon the marketplace. Broumas's wash trades and matched orders violated Sections 9(a)(1) and 9(a)(2) of the Exchange Act. Sections 9(a)(1) and 9(a)(2) require that the proscribed activities be engaged in with the requisite manipulative intent. Transactions which violate Section 9(a)(1) can serve as the basis for a violation of Section 9(a)(2). Michael J. Meehan, 2 S.E.C. 588, 615-618 (1937). However, transactions such as wash sales and matched orders, as are present in this case, which constitute violations of Section 9(a)(1), have been held to be per se manipulative. Cite? Respondents argue that there is unequivocal proof that Section 9(a)(1) of the Exchange Act was not violated by Broumas. RPFF at 23. In support of this argument Respondents state in substance that there was no intent to manipulate the market and that a substantial number of the wash sales were unreported and could not have impacted market prices and those that were reported did not impact prices. I disagree. Broumas subverted the normal dynamics of the market by trades that were fictitious on the one hand since he was trading with himself and on the other hand were real since he was using the float to obtain money as if it was a genuine sale. It is considered that investors have ==========================================START OF PAGE 22====== the right to assume that security trades are authentic with a dynamic impact on prices and not a device to obtain money from the float through wash sales. With respect to the argument that much of the trades were not reported, the Commission noted in Mawod & Co. that formal reporting is not an essential ingredient in a wash sale violation: In the over the counter markets there was no tape. And until the National Association of Securities Dealers, Inc. developed the automated quotation system known as NASDAQ, trading volume was normally something that even an astute professional could only guess at .... But the brokers and dealers through whom orders in a particular issue funnel know whether it is active or inactive. And when it is active that information filters out to investors.-[9]- Mawod & Co., 46 S.E.C. at 870 n. 24. Further, it has been erroneously argued that the stock manipulation must occur through a national exchange. My reading of Section 9(a)(1) merely requires that the stock be listed on the national exchange (American Stock Exchange in this case), not that manipulation occur through the Exchange. See Mawod & Co., 591 F.2d at 595-96. Respondents also argue that neither respondents nor Broumas ever requested that the wash sales be reported to AMEX and that one must conclude that there was never any manipulative intent in violation of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. RPFF at 27. Assuming arguendo the factual correctness of this claim, I disagree with the ---------FOOTNOTES---------- -[9]-I disagree with Respondent that Mawod is inapplicable because it deals with a different market. It is considered that there is a considerable network effect operating for unreported trades for all of the large markets. ==========================================START OF PAGE 23====== conclusion. In order to obtain funds from the float, Broumas had to manipulate the market using the wash sale device. It is not considered that the price in a wash sale is genuine, as contemplated by the securities market, since it was between the same person without any competitive pressures. This contrived manipulated price was used to obtain money from a float. The wash sale device that was used to manipulate the price is, under the facts of this case, proscribed by Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. Accepting arguendo respondents' argument that specific intent is required, the record here clearly establishes specific intent every time Broumas used the wash sale with assistance of Respondent Graham. Additionally, I found that of the 76 trades executed by Voss & Co., 22 trades were reported. This amounted to 202,825 shares of JML class A stock. The volume reported in the newspaper represented largely hidden wash sales and an investor would be beguiled into thinking that there was substantial activity in the market when in fact there was little. The harm to an investor seeking an active market in JML stock is obvious. In other instances, the Commission has recognized that, absent an admission, an inference of manipulative intent may be drawn and a prima facie case shown when a person with substantial pecuniary interest in achieving a price change engages in the type of market activity proscribed by Sections 9(a)(1) and 9(a)(2) of the Exchange Act. Batterman, 46 S.E.C. at 305; Halsey, Stuart & Co., Inc., 30 S.E.C. 106, 123-24 (1949); The ==========================================START OF PAGE 24====== Federal Corp., 25 S.E.C. 227, 230 (1947). This is exactly what happened in the instant case. Broumas's pattern of placing wash trades and matched orders in JML Class A stock constituted a manipulative practice per se under Section 9(a)(1) of the Exchange Act because it created the false or misleading appearance of active trading in JML Class A stock, and a false or misleading appearance with respect to the market for JML Class A stock. This pattern of conduct also violated Section 9(a)(2) of the Exchange Act because Broumas's purchases and sales created the false and misleading appearance of active trading in JML Class A stock. Broumas's motive can be inferred from the fact that he engaged in an extensive and repeated pattern of placing wash trades and matched orders while having a clear and substantial financial interest in raising or depressing the price of JML Class A stock. Broumas admitted that he faced margin calls if the price of JML Class A stock dropped significantly. He also admitted that he engaged in the pattern of wash trades and matched orders to take advantage of the "float," i.e., he obtained the use of the proceeds generated by a "sale" immediately while not being required to pay for the corresponding "purchase" until seven days later. During the eighteen month period in question, Broumas arranged for a total of 484 violative trades in JML Class A stock. See Thornton & Co., 28 S.E.C. 208, 222-225, 224 n.21 (1948). The respondent in Thornton used sales tickets for collateral. The Commission found that the purpose of the trade was to create a false and ==========================================START OF PAGE 25====== misleading impression of active trading in violation of Sections 9(a)(1) and 9(a)(2) of the Exchange Act. As Thornton indicates, "Purchasers in over-the-counter as well as the Exchange market are entitled to believe that the Exchange market price which governed the price charged them represents a price established in an independent market free of artificial devices." Id. at 224. This would by implication require that all transactions be reported and be subject to, as well as effect, the competitive market. Here the failure to report in many instances and the fixing of the prices subverted operation of a free marketplace. Further, the parties who loaned money on margin were defrauded as Broumas engaged in a charade pretending that there were genuine trades at a price set competitively. Whatever other motives he might have had, Broumas must be deemed reasonably to have anticipated what would follow from his activity. As indicated, Broumas's wash trades and matched orders had a significant effect on the reported volume during the relevant period. Furthermore, the sheer number of wash trades and matched orders placed by Broumas in JML Class A stock over an eighteen month period, combined with his use of numerous brokers and nominee accounts, clearly leads to the conclusion that Broumas effected a series of transactions in JML Class A stock, creating apparent active trading in that stock for the purpose of inducing others to buy the stock. See Meehan, 2 S.E.C. at 615- 618. "[A]ctivities [constituting wash sales and matched orders under Section 9(a)(1)] in connection with the purchase or sale of ==========================================START OF PAGE 26====== any security operate as a fraud or deceit upon any person and are prohibited by Section 10(b) of the Exchange Act and Rule 10b-5 thereunder." Batterman, 46 S.E.C. at 305. The Commission has held that elements of proof under Section 10(b) and Rule 10b-5 are different from those under Sections 9(a)(1) and 9(a)(2). Unlike Sections 9(a)(1) and 9(a)(2), no showing of manipulative purpose is required to establish a violation of Section 10(b) and Rule 10b-5. "It is sufficient for the person to engage in a course of business which operates as a fraud or deceit as to the nature of the market for the security." Id. at 305 (emphasis added). Broumas's pattern of placing orders for wash trades and matched orders in JML Class A stock clearly operated as a fraud or deceit upon the investing public by creating the false and misleading appearance of activity in the stock. The investing public is led to believe that the volume in a given stock--as reported in the newspaper--reflects genuine supply and demand for that security. The investing public is deceived when, as here, during an eighteen month trading period, at least 36.6% of the total reported volume in a particular security represents a complete fiction in that there was absolutely no change in beneficial ownership of that stock. The use of nominee accounts in which to conduct such manipulative trading--especially when third party trading authority was lacking--is not genuine demand. United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972); SEC v. Commonwealth Securities, Inc., 410 F. Supp. 1002, 1009-1012 ==========================================START OF PAGE 27====== (S.D.N.Y. 1976), aff'd in part, modified in part, and remanded, 574 F.2d 90 (2d Cir. 1978); Mawod & Co., 46 S.E.C. at 871-72. That practice in and of itself is deceptive. To establish a violation of Section 10(b) of the Exchange Act, it must be proved that Broumas acted with scienter. Scienter has been defined by the Supreme Court as a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). The Commission and most circuit courts, however, have held that recklessness will suffice. See e.g., Mawod & Co., 591 F.2d at 595-96; Michael Joseph Boylan, 47 S.E.C. 680, 687 (1981). The usual formulation of recklessness cited by the courts is set forth in Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977): Reckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers and sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Id. at 1045. The record reflects such highly unreasonable omissions on the part of the respondents. Respondents argue that they had no actual knowledge of the fraud. However, proof of scienter in manipulation cases need not be direct, but rather may be inferred from circumstantial evidence, including evidence of price movement, trading activity, and other factors. See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91 n.30 (1983); Santa Fe Industries v. Green, ==========================================START OF PAGE 28====== 430 U.S. 462, 475 (1977); Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir 1986); Mawod & Co., 591 F.2d at 596. Further, proof of manipulation is generally not based on a single activity, but rather on a course of conduct showing an intentional interference with the normal functioning of the market for a security. Indeed, manipulation is usually the result of acts, practices, and courses of conduct that deceive the marketplace: Proof of a manipulation almost always depends on inferences drawn from a mass of factual data. Findings must be gleaned from patterns of behavior, from apparent irregularities, and from trading data. When all of these are considered together, they can emerge as ingredients in a manipulative scheme designed to tamper with free market forces. Pagel, Inc., 48 S.E.C. 223, 226 (1985) (emphasis added). Moreover, it is not necessary to rely on direct evidence that Broumas willfully manipulated the market. Instead, I may rely on inferences drawn from the evidence adduced at the hearing to reach the conclusion that an illegal manipulation occurred. Collins Securities Corp. v. SEC, 562 F.2d 820, 822-23 (D.C. Cir. 1977). Broumas had a pecuniary interest in the manipulation for several reasons: he was a director of JML and chairman of the board of Madison of Virginia; he held JML Class A stock on margin in numerous accounts, including nominee accounts; and he was heavily in debt. In addition, by placing wash trades and matched orders, Broumas engaged in a pattern of trading which is clearly proscribed by Sections 9(a)(1) and 9(a)(2), and which operated as a fraud or deceit on the marketplace by creating the false and ==========================================START OF PAGE 29====== misleading appearance of active trading in JML stock. Broumas engaged in this conduct either intentionally or recklessly. Broumas repeatedly engaged in a pattern of activity designed to mark-the-close in JML Class A stock. By placing a series of transactions in JML Class A stock which marked-the-close, Broumas violated Section 9(a)(2) of the Exchange Act because this pattern of trading artificially raised or supported the market price of JML Class A stock at the close. Furthermore, this pattern of conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because the repeated purchases--executed on an uptick, or a zero plus tick--at or near the end of the trading day had the effect of increasing or supporting the closing price of JML Class A stock on those days. The Commission has held that the practice of placing orders at or near the end of the day in order to cause the stock to close at an uptick violates Section 9(a)(2) of the Exchange Act. Jacob Schaefer, 12 SEC Docket 1128, 1129 (1977). As stated above, in order to prove that Broumas violated Section 9(a)(2) by placing marking-the-close trades, it must be proved that he did so for the purpose of inducing the purchase or sale of the security by others. Absent an admission, manipulative intent may be inferred from circumstantial evidence. Although there is plentiful evidence from which such intent might be inferred, I need not rely upon a mere inference; Broumas clearly stated to Mr. Havill that at least one of his motives for placing the late day trades was "to create some interest in the stock because if ==========================================START OF PAGE 30====== nobody buys it on a certain day, it doesn't show up in the listing in the paper." He went on to tell Mr. Havill that he didn't want investors to forget that the bank was around, "so he was just trying to stir up a little interest in the stock." Dec. Tr. 293 (Havill). The practice of marking-the-close also constitutes a violation of Section 10(b) and Rule 10b-5 of the Exchange Act. See e.g., Stein, 456 F.2d 844 (2d Cir. 1982) (artificial shoring up of the price through purchases of 100 share round lots, often at the end of the day, on a "plus tick" at various brokers and in the names of various nominees). Broumas's pattern of marking- the-close injected into the marketplace an artificial price for JML Class A stock, thus operating as a fraud or deceit on the investing public. Information concerning a manipulation and the artificiality of the market price is material information the public is entitled to know. Given that the Commission has specifically recognized the impropriety of the practice of marking-the-close when done to avoid or reduce margin calls, it is considered that Broumas acted with scienter. Andrew Doherty, 49 SEC Docket 0859, 0861 (1991).-[10]- Respondents Graham and Voss Voss & Co., a registered broker-dealer located in Springfield, Virginia, functions as a discount broker for ---------FOOTNOTES---------- -[10]-There is no contention that the respondents participated or aided or abetted Broumas in marking-the-close transactions. ==========================================START OF PAGE 31====== unsolicited customer orders. Voss and Graham Answers, I.A.; Apr. Tr. 361 (Voss). Voss & Co. is the largest independent discount brokerage firm in Virginia. Apr. Tr. 361 (Voss). Voss is the president of Voss & Co. and has been licensed by the NASD since 1971. He founded Voss & Co. in February 1973 with Richard Kulak, a respondent in a related Commission proceeding. Admin. Proc. File No. 3-8509. He bought out Kulak's interest two years later. Apr. Tr. 335 (Voss). Voss knew Broumas prior to the founding of Kulak, Voss & Co. Apr. Tr. 381. In 1989 and 1990, Voss & Co. cleared its transactions, on a disclosed basis, through U.S. Clearing Corp. Apr. Tr. 202-203 (Pasztor). Voss currently holds a securities principals license and others which he cannot recall. When he started his firm, he was a registered principal. Apr. Tr. 342-43 (Voss). Voss is also a director of Noxso Corporation, and in 1989 and 1990 spent 90 to 95 percent of his time on that company's business. Apr. Tr. 356-57. Graham, licensed by the NASD since May 1984, has been employed by Voss & Co. as a registered representative since September 1984. Graham Answer II.F. Apart from the instant proceeding, Graham has never been the subject of any disciplinary sanction or proceeding or customer complaint. Apr. Tr. 143-44 (Graham). Pasztor was employed most recently as vice president and compliance officer by Voss & Co. from January 1983 to March 1992. He reported directly to Voss, who was the sole owner of the firm. Apr. Tr. 171 (Pasztor). Pasztor began working at Voss & Co. in 1982, working as a broker in commodity futures for approximately ==========================================START OF PAGE 32====== one year. Apr. Tr. 167-68 (Pasztor). While at Voss & Co., he became licensed in securities and also obtained his principal's license and became branch manager. Apr. Tr. 168 (Pasztor). When Pasztor became manager, there were eight to ten employees of the firm, most registered representatives. Apr. Tr. 168-69 (Pasztor). He worked at Voss & Co. for almost ten years, until March 1992, and for seven or eight of those years was the manager. When he left, he was the manager and held the title of vice-president. Apr. Tr. 168-69 (Pasztor). He is now a manager for Quick & Reilly at its branch office in Greensboro, North Carolina. Apr. Tr. 169-70 (Pasztor). During 1989 and 1990, Pasztor ran the office and was responsible for overseeing the office brokers. He was also responsible for financial reporting, expenses, hiring, and general office management. Apr. Tr. 170-71 (Pasztor). In 1982 and 1983, Graham had worked for Stuart-James, a penny stock broker-dealer in Florida, as a registered representative before transferring her license to Voss & Co. Apr. Tr. 44-45 (Graham). She functions as a registered representative of Voss & Co. in addition to cashier and back office assistant, positions that she held throughout the relevant time period. Apr. Tr. 44-45 (Graham). Graham has a Virginia securities license, a commodities license, and a principal's license. She obtained her principal's license in February 1990 and acts as a back-up if one of the managers is not in the office. Apr. Tr. 47 (Graham). Graham has never functioned in ==========================================START OF PAGE 33====== the capacity of a day-to-day supervisor at Voss & Co. Apr. Tr. 47 (Graham). She considered Voss and Pasztor her supervisors. Apr. Tr. 78 (Graham). For at least one year, Chema worked at Voss & Co. at the same time as Graham. Apr. Tr. 47 (Graham). At first Graham did not know Chema's place of employment when he left Voss & Co., but when Chema called Graham to execute trades for John Broumas, she became aware that Chema worked for H. Beck. Apr. Tr. 50 (Graham); Ex. 1105. Graham was familiar with Carole Haynes, who is a respondent in a related Commission proceeding. Admin. Proc. File No. 3-8512. Although she never met Haynes during 1989 and 1990, Graham spoke with her during that time while executing Broumas's trades, and she was aware that Haynes worked at First Potomac. Apr. Tr. 48, 155 (Graham). Although she never met Kulak during 1989 and 1990, Graham spoke with him during that time while executing Broumas's trades. Apr. Tr. 48-49 (Graham). Graham was also familiar with Ronald Lara, who is a respondent in a related Commission proceeding. Admin. Proc. File No. 3-8509. Although she never met Lara during 1989 and 1990, Graham spoke with him during that time while executing Broumas's trades. She knew that Lara worked at Lara, Millard & Associates, Inc. Apr. Tr. 49 (Graham). In 1989 and 1990, Graham's work station was close to Pasztor's, and they spoke throughout the day. Apr. Tr. 190-191 (Pasztor). She had a good manager-employee relationship with Pasztor during 1989 and 1990 and believed that he was fair. Apr. ==========================================START OF PAGE 34====== Tr. 133 (Graham). Graham was less sophisticated than Pasztor with respect to securities trading practices as well as the rules and regulations governing such practices. Apr. Tr. 259 (Pasztor). Pasztor encouraged the brokers at Voss & Co. to consult with him if they had any questions and Graham, would do so. Apr. Tr. 260 (Pasztor). Graham followed Pasztor's recommendation whenever she came to him for advice. Apr. Tr. 260 (Pasztor). In 1989 and 1990, Graham was the firm's primary house broker, handling house accounts on a non-commission basis. Apr. Tr. 44-46, 52 (Graham). Graham's cashier and back office work at Voss & Co. consumed approximately 70 percent of her time. Apr. Tr. 139-40 (Graham). Graham handled an average of 10 to 20 trades a day. Some were house account trades, and some were for her own customers' accounts. Apr. Tr. 151-152 (Graham). Prior to the hearings in this matter, Graham had never met or even seen Broumas. Apr. Tr. 51 (Graham). She knew him only in the context of her executing his orders as a house account. Apr. Tr. 51-52 (Graham). Graham knew that, prior to 1989, Broumas traded at Voss & Co. through a joint margin house account he held with his wife, in the name of John and Ruth Broumas (the joint account). Apr. Tr. 51-53, 56 (Graham). During 1989 and 1990, most of the trades in the joint account were executed by Graham. Apr. Tr. 177 (Pasztor). Prior to 1989, Graham had executed some trades in the joint account and she executed trades for Broumas in JML stock as early as April or May, 1988. Apr. Tr. 51-56 (Graham). Initially, when Broumas called to execute a ==========================================START OF PAGE 35====== trade, the receptionist referred Broumas to Graham. Eventually, Broumas specifically asked for Graham when he called. Apr. Tr. 52-53, 56 (Graham). Prior to 1989, Graham knew that Broumas was employed by McLean Bank. When the bank's name changed to Madison National Bank of Virginia, she assumed that it had been taken over by James Madison and she knew that Broumas continued his employment there. Apr. Tr. 54-55 (Graham). In 1989 and 1990, Graham knew that Broumas was an officer of Madison National Bank of Virginia, and a director of James Madison, Limited. Apr. Tr. 55, 144 (Graham). As of December 31, 1988, there were 37,500 shares of JML Class A stock in the joint account. Div. Ex. 400. From January 23, 1989, through May 24, 1990, Broumas directed Graham and others at Voss & Co. to execute a total of 76 over-the-counter trades for JML Class A stock, in which 644,800 shares were traded, using three different accounts: the joint account, an account entitled Les Girls, and an account in the name of L. Lawton Rogers. Exs. 2, 6, 1105; Apr. Tr. 59 (Graham). In 1989 and 1990, the majority of Broumas's trades and holdings in the joint and Les Girls accounts involved JML stock. Apr. Tr. 67-68 (Graham). Of the 76 directed trades of JML Class A stock that occurred in the three accounts, Graham executed approximately 60 of the trades. Apr. Tr. 59-60 (Graham); Graham Answer II.H.; Ex. 1105. Graham executed a directed trade in JML stock an average of once every one-and-a-half weeks during the 18-month period at issue. Div. Ex. 1105. Pasztor executed some of the ==========================================START OF PAGE 36====== remaining 16 Broumas transactions that Graham did not execute. Apr. Tr. 120-121 (Graham). Generally, Broumas would call and give Graham an order to buy or sell JML Class A stock off the exchange, the number of shares to buy or sell, a limit price, and the contra broker with whom he wanted her to trade and she would check the bid and offer price on the AMEX and tell Broumas this information. Apr. Tr. 60-63 (Graham). Graham claimed that she would then go to Pasztor for approval of the trade which would be indicated by his initialing the order ticket. After obtaining Pasztor's approval, Graham would execute the trade. Apr. Tr. 60, 97 (Graham). If Broumas wanted money out of his margin account after he sold stock, Voss & Co. would have to determine when he deposited his check for the purchase of those shares. The clearing company's policy was to wait three business days for the check to clear. Apr. Tr. 147-150 (Graham). There were no occasions on which Broumas bought JML stock in his margin account and, before payment was due, sold that stock. He always paid for the stock first and thereafter would sell. Apr. Tr. 148-149 (Graham). In most of the 60 trades that Graham did for Broumas, he would ask for a check the next day on a sale. If the three day criteria was met, Voss & Co. would issue him a check. Apr. Tr. 150-151 (Graham). In 1989 and 1990, Graham dealt with approximately 100 other house accounts. She did not seek Pasztor's approval for these accounts unless there was a problem. Apr. Tr. 65 (Graham). ==========================================START OF PAGE 37====== None of the other house accounts that Graham handled involved trades that were directed in the manner that Broumas directed his. Apr. Tr. 65 (Graham). Although Broumas never told her that he had accounts at any of the brokerage firms with whom she executed these 60 trades, Graham assumed that Broumas had accounts at the other firms; that Broumas controlled the JML shares involved in Voss & Co.'s trades with these firms; and that he had connections with the firms. Apr. Tr. 66-67, 162 (Graham). Graham executed Broumas's trades through approximately three or four other firms on a regular basis. Apr. Tr. 133-34 (Graham). I find that inasmuch as Graham knew that Broumas made no money on these trades, she knew or should have known that these were wash trades and that some were matched orders. In about mid-1990, Graham asked Broumas why he was engaging in directed trading and he responded that it was a way for him to borrow funds in order to repay outstanding bank loans. Apr. Tr. 136-37 (Graham). Broumas had a history of payment problems at Voss & Co. As early as 1986, Voss & Co.'s clearing firm had restricted the Broumas joint account for one year. Pasztor wanted to shut down Broumas's joint account because of the extensions-[11]- and his concern that it was being used for check-kiting. Apr. Tr. 284 (Pasztor). Broumas's trading was a gray area to Pasztor with which he was not that familiar, and he relied on Voss's judgment ---------FOOTNOTES---------- -[11]-An extension occurs when a customer is late paying for his purchase within the five business day requirement, and has to file for a two-day extension. The five-day rule applied to both cash and margin accounts. Apr. Tr. 68-69 (Graham). ==========================================START OF PAGE 38====== as far as Broumas's trading was concerned. Apr. Tr. 285-86 (Pasztor). After a conversation with James Talty, the margin supervisor at Voss & Co.'s clearing firm, who thought that the Broumas joint account had too many extensions and might be being used to check- kite, Pasztor told Broumas and Voss that Broumas could not have any more extensions in his account. Apr. Tr. 193-94 (Pasztor). In a conversation with Pasztor, in which Broumas indicated that he wanted to continue trading with Voss & Co., Pasztor told Broumas to talk to Voss if he desired. Apr. Tr. 194 (Pasztor). In order for Broumas to have continued trading in the joint account in February 1989, he would have had to deposit money or stock into the account. However, Broumas did not do that. If he had satisfied the restrictions imposed on the account, he could have continued to trade. Apr. Tr. 411-13 (Voss). In spite of knowing about extensions and directed trading in the joint account, Voss told Pasztor that he was authorizing the opening of another account for Broumas. Apr. Tr. 195-196, 284 (Pasztor). The Les Girls account was opened on February 22, 1989 and was signed by Graham. Pasztor also initialed the form based on Voss's approval. Apr. Tr. 196-97, 199 (Pasztor); 71-72 (Graham); Ex. 220 at 5. The Les Girls account was supposedly a partnership between Broumas's wife and daughter. However, neither Graham nor Voss ever talked to Broumas's wife or daughter, nor did she know that Broumas had a daughter. Broumas ordered all of the trades in the Les Girls account, and Graham considered the Les Girls ==========================================START OF PAGE 39====== account to be an account controlled by Broumas. Apr. Tr. 72-74, 76 (Graham). Broumas directed 21 trades in JML Class A stock in the Les Girls account from March 21, 1989 until August 29, 1989. Apr. Tr. 77-78 (Graham); Ex. 1105. Voss acknowledged that he was familiar with the circumstances surrounding the opening of the Les Girls account. Apr. Tr. 393-95 (Voss). Voss knew that Broumas had directed the trading in the joint account for many years. Broumas executed 40 trades in the account in JML Class A stock between February 24, 1989 and March 29, 1990. Voss was aware of the trades at the time they were occurring. Apr. Tr. 302 (Pasztor); 401-2 (Voss); Ex. 1105. Pasztor concedes that he too was aware of every one of these directed trades as they were occurring. Apr. Tr. 302 (Pasztor). Pasztor initialed and approved all of the order tickets for trades in the Les Girls account. Apr. Tr. 285 (Pasztor).-[12]- Pasztor authorized Graham to reduce the commission to three cents per share on Broumas's trades. Apr. Tr. 82-3 (Graham). Graham stated that she and Pasztor discussed Broumas's trading and felt that Broumas had a peculiar way of trading, with his buying and selling of the same stock. She knew as the cashier that Broumas rarely made money on his trades. Apr. Tr. 85-86, 160, 162-163 (Graham). Broumas told Graham and ---------FOOTNOTES---------- -[12]-Respondent Voss argues that he ordered that the Les Girls account be subject to the same restrictions as the joint account but that Pasztor and Graham failed to follow his instructions. While I doubt the accuracy of this claim, Voss would then have been remiss in failing to monitor his instructions. Apr. Tr. 402-3 (Voss). ==========================================START OF PAGE 40====== Pasztor that he owed on a bank note and that he could sell stock and take the money from his stock account to pay it and when he had the funds, he would buy back the stock to maintain his position in JML. Apr. Tr. 87-8 (Graham). This response was a red flag and should have created suspicion. Broumas's trading activity should have been further investigated at this time. Lawton Rogers had a house account as of June 20, 1980, with Voss & Co. that Graham also handled on a non-commission basis. Apr. Tr. 106 (Graham). From February 1990, she executed the majority of the six trades in JML Class A stock in the Rogers's account. Ex. 1105. Broumas called in the orders on the trades in the Rogers account and told Graham what he wanted done. However, because Broumas did not have power of attorney in Rogers's account, Graham had to speak directly with Rogers so that he could confirm what trades were to be done. Apr. Tr. 109 (Graham). At the time she executed these trades in the Rogers account, Graham believed that Rogers and Broumas were friends and that Rogers may have been Broumas's attorney. Apr. Tr. 109 (Graham). Near the end of Broumas's trading, when Broumas owed money, Graham called Rogers to find out the status of Broumas's payment. Apr. Tr. 109-10 (Graham). The trades of JML stock in the Rogers account were directed in the same manner as Broumas's trades. They were also approved by Pasztor prior to Graham executing the trades. Apr. Tr. 110 (Graham). On one occasion, Rogers asked Graham, after she sold 12,000 shares of JML, to courier him a ==========================================START OF PAGE 41====== check the next day, and Graham directed the responsible person to do that. Apr. Tr. 111-13 (Graham); Ex. 1071. This also should have been a red flag to Graham that Broumas was engaging in wash sales. Rogers was able to receive a check within one day after the trade because he had a margin account. However, he was charged interest for the amount of time between when the check was sent and settlement. For purchases, Rogers was still bound by the five business day rule. Apr. Tr. 113 (Graham). Pasztor was aware as it was occurring that there were directed trades in JML stock through the Lawton Rogers account and he informed Voss of this. Apr. Tr. 213 (Pasztor). Voss told Pasztor that Broumas and Rogers were "bosom buddies" and that he did not have a problem with Rogers directing the trades. Apr. Tr. 213 (Pasztor). During 1989 and 1990, Graham was unaware that Voss & Co. was to report the sales volume for off-exchange trades of exchange-listed securities. Apr. Tr. 113-17 (Graham). The issue came to her attention towards the end of Broumas's trading activity in 1990, through a conversation with a contra broker at Scott & Stringfellow concerning the execution of one of Broumas's trades. The broker asked her whether Voss & Co. was reporting the volume or the trade or not. Apr. Tr. 197-98 (Pasztor). Graham immediately informed Pasztor of the issue. Apr. Tr. 113-14 (Graham). After this conversation, there were two occasions in May 1990 in which Voss & Co. reported the volume on Broumas's directed trades. Graham thought that Pasztor checked to find out what procedures to ==========================================START OF PAGE 42====== follow but the issue was not resolved. Apr. Tr. 113-15 (Graham). Pasztor did not know, in April 1990, that there was any obligation to report volume on the type of trades that were being executed for Broumas. Apr. Tr. 202 (Pasztor). Pasztor called Dick Orie, who worked in the compliance department of the U.S. Clearing Corporation, to find out whether there were any reporting requirements in Broumas's type of trades. Orie did not seem familiar with the reporting requirements but he was concerned about Broumas being an insider of JML and told Pasztor to "Get rid of the account." Apr. Tr. 203 (Pasztor). Pasztor told Voss about his conversation with Orie and Voss subsequently called Orie and spoke to him. Apr. Tr. 204 (Pasztor). After speaking to Orie, Pasztor never made any further inquiries or called anyone at the NASD to attempt to find out the volume reporting requirements on off-exchange trades. Apr. Tr. 207 (Pasztor). Pasztor never understood what the volume reporting requirements were on Broumas's trading of JML Class A stock. Apr. Tr. 207 (Pasztor). Inexplicably, the volume for 22 of Broumas's directed trades of JML Class A stock at Voss & Co. was reported, either by Voss & Co. or the contra broker. The total reported volume on the 22 trades was 202,825 shares. Ex. 4. Although Pasztor could not recall ever initialing order tickets for Graham when she took orders from Broumas to trade JML stock, he acknowledged that Graham probably came to him for prior approval with respect to quite a few of the Broumas trades. Apr. ==========================================START OF PAGE 43====== Tr. 324-25 (Pasztor). Graham could look on her own computer screen to tell if the Broumas account had a debit or an outstanding obligation without coming to Pasztor. Apr. Tr. 323- 24 (Pasztor). As a result of reviewing and initialing the order tickets for the Broumas trades, Pasztor had knowledge of every directed trade that Graham did for Broumas. Apr. Tr. 279 (Pasztor). Pasztor was aware of each of the 30 trades in the joint account that took place between January 23, 1989 and May 14, 1990, as each trade occurred. Apr. Tr. 211-12 (Pasztor); Ex. 1105. Pasztor also was aware of each of the 40 trades of JML stock that Broumas directed in the Les Girls account between February 1989 and March 1990, as each trade occurred. Apr. Tr. 214-15 (Pasztor); Ex. 1105. During the ten years he worked at Voss & Co., Pasztor knew of no other customers who directed trades in the third market in the way that Broumas and Rogers did. Apr. Tr. 192-93, 214, 247 (Pasztor). When he first was asked by Broumas to do a directed trade, he discussed it with Voss prior to executing the trade. Apr. Tr. 191-92 (Pasztor). He had not handled a trade like this before. Voss was in the office, and he asked Voss if directing the trade was something Broumas could do, and Voss said that it was fine. The impression Pasztor had from Voss was that it was not a problem to do the trade.-[13]- Apr. Tr. 192 (Pasztor). ---------FOOTNOTES---------- -[13]- Respondents' counsel raises the question as to an inconsistency in the record at April Tr. p. 69 where Pasztor indicates that he did not know who directed the first trade. I do not find this significant. What is material is the statement that (continued...) ==========================================START OF PAGE 44====== In April or May 1990, Broumas wrote a bad check for the purchase of some JML shares, and Pasztor informed Broumas and Graham that Broumas could not trade in his accounts without having cleared funds. Apr. Tr. 207-8 (Pasztor). Voss then met with Broumas for lunch (the lunch), and subsequently, Voss called Pasztor on the telephone and told him that Broumas could place trades again, even though the accounts did not have cleared funds. Apr. Tr. 209 (Pasztor). Voss was aware that Broumas placed additional trades through his accounts at Voss & Co. after this. Apr. Tr. 209-10 (Pasztor). Voss in his supervisory role should have stopped all such trading. Throughout the time Pasztor was at Voss & Co., including 1989 and 1990, Pasztor spoke to Voss by telephone or in person almost every day, unless Voss was overseas on a trip. Apr. Tr. 173 (Pasztor). Pasztor had no authority over Voss with regard to compliance matters at Voss & Co., or any other firm matters. By contrast, as president and owner, Voss had the authority to overrule Pasztor on any matters. Apr. Tr. 174 (Pasztor). Further, Voss had more experience in the securities business and in compliance matters than Pasztor. Apr. Tr. 281. Pasztor never reported to anyone other than Voss from the point in time when he became in charge of compliance. Apr. Tr. 234 (Pasztor). When Pasztor assumed his compliance duties, he had the ability to and did go to Voss as a resource regarding compliance matters. Apr. ---------FOOTNOTES---------- -[13]-(...continued) Voss was consulted and approved of the trade. Whether this was in actuality trade number 1, 2 or 3 is not critical. ==========================================START OF PAGE 45====== Tr. 234 (Pasztor). When he was made branch manager, Voss & Co. did not have a compliance manual. Pasztor put together the first one at some time prior to January 1989. Voss reviewed the manual, and all subsequent ones, prior to distribution to the registered representatives and others at the firm. Apr. Tr. 235- 36 (Pasztor). In 1989 and 1990, Voss & Co.'s compliance manual did not contain procedures designed to detect either wash trades or matched orders. Apr. Tr. 240-41 (Pasztor); Ex. 240. Voss admitted that he did not know whether Voss & Co. had in place written procedures designed to detect or prevent wash trades. He had no recollection at the hearing of what was in the compliance manual. Apr. Tr. 429-30 (Voss). During 1989 and 1990, Voss did not work in the office on a day-to-day basis. Over time, he was in the office less and less. In the first half of 1989, if he came in, it would be in the afternoons a few times a week and by 1990, Voss was not coming into the office at all. Apr. Tr. 171-72 (Pasztor). During that time, Voss was involved with a public company, Noxso Corporation, as a director and one of the largest shareholders. Apr. Tr. 172- 73 (Pasztor). Pasztor sometimes brought problems relating to personnel or accounts to the attention of Voss. There were general principles and rules set up at Voss & Co. so that Pasztor could automatically take whatever actions he needed to take with respect to such problems. However, if there was something that was unusual, he would bring it to the attention of Voss. Apr. Tr. 367-68 (Voss). Voss claimed that, in 1989 and 1990, he had ==========================================START OF PAGE 46====== no responsibilities at Voss & Co. Apr. Tr. 368 (Voss). However, he acknowledged that he wanted to know what was going on at the firm financially and personnel-wise. Apr. Tr. 368-69 (Voss). Voss stated that he purposefully delegated compliance responsibility to Pasztor so that he could attend to his other business. Apr. Tr. 427-28 (Voss). During the period from January 1989 to June 1990, there were two occasions on which Pasztor sought to stop Broumas's trading in JML stock at Voss & Co., but was, in effect, overruled by Voss. Apr. Tr. 252-53 (Pasztor). Prior to the Les Girls account being opened, Voss knew that Broumas was trading JML stock, that he was trading the same stock over and over again, that he was late paying and had many extensions. That is why the joint account was being shut down. Voss knew of that pattern. Apr. Tr. 303, 304 (Pasztor). The New York Stock Exchange rules prevented the clearing firm from accepting trades in an account which was without funds. Voss informed Broumas and Pasztor that Broumas could not trade further in the joint account until the account had stock or money deposited in it. Apr. Tr. 411 (Voss). When Voss opened the Les Girls account, despite the problems with the joint account, Voss claimed to have applied the same restrictions to the Les Girls account with the same instructions to Pasztor. Apr. Tr. 413 (Voss). In mid-1988, Voss personally took an order from Broumas for JML stock, either Class A or the common stock. The trade was the first directed trade Voss knew of. Voss believes that Broumas ==========================================START OF PAGE 47====== told him where to complete the trade, and that he provided the number of shares, price and the contra broker. The trade was off the exchange. Voss did not ask Broumas at that time why he was directing the trade. Before February 1989, Voss acknowledges that he may have been aware that Broumas directed trades of JML stock through his account, and that Pasztor may have told him. Apr. Tr. 405-6 (Voss). Pasztor acknowledged that Broumas obviously had knowledge of who was on the other side of the trades. He also acknowledged that Broumas probably had accounts at other firms, and that he had relationships with the firms through which Pasztor executed Broumas's directed trades. Apr. Tr. 308-309 (Pasztor). Further, Voss became aware between 1988 and 1990 that Broumas traded JML stock almost exclusively through his accounts. Apr. Tr. 409-10 (Voss). I do not find Voss's claim credible that he was not aware in 1988, 1989 or 1990 that Broumas had accounts at other firms. Apr. Tr. 419-20 (Voss). Voss did not recall Pasztor telling him in or about February 1990 that Broumas was directing trades of JML stock through Rogers's account. Apr. Tr. 426 (Voss). Voss claimed--and I question the credibility of that claim--that, at the lunch, Broumas did not request that Voss continue to allow Broumas to trade in his accounts at Voss & Co. Apr. Tr. 435-36 (Voss). In the spring of 1990, Pasztor told Voss about the conversation with Orie concerning the Broumas accounts. Voss called Orie. The question was whether Broumas was violating Rule 144, 17 C.F.R. 230.144, with his activities in JML. Voss instructed Pasztor to contact ==========================================START OF PAGE 48====== JML counsel and obtain an opinion letter, and he did. Apr. Tr. 436-37 (Voss). Voss claims, but I do not find the claim credible, that he was not aware in 1989 or 1990 of the frequency of Broumas's trades in JML stock. Apr. Tr. 465-66 (Voss). Voss claims that Pasztor never told Voss that the Broumas's trades potentially violated the securities laws. Apr. Tr. 283 (Pasztor). Respondents argue (Resp. Brief at 59) that the Commission is equitably estopped by the NASD's failure to lodge a complaint. This argument is not sound inasmuch as the NASD prosecution of the Schedule G violation is not in issue in the instant case. Rather, the focus of this case is the illegal wash sales. Further, NASD actions do not preclude SEC determinations under the securities laws. As is noted in the record, the SEC was not required to compromise its investigations to provide directions to the respondents. Respondent Graham Aided and Abetted Broumas's Violations In order to establish liability for aiding and abetting, the Division must establish (1) the existence of a primary violation, (2) a "knowledge" requirement, i.e., that the aider and abetter had general awareness that his role was part of an overall activity that was improper, and (3) that the aider and abetter substantially assisted the principal violation. Kevin Upton, 58 SEC Docket 1993, 2001 (1995); Dominick & Dominick, Inc., 50 S.E.C. 571, 577 (1991). In applying these elements, all three should be examined collectively, and no single element should be ==========================================START OF PAGE 49====== considered in isolation. See ITT, International Investment Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). In my March 24, 1995 order, I found that Broumas manipulated the market for JML Class A stock, and in doing so violated Sections 9(a)(1), 9(a)(2)-[14]- and 10(b) of the Exchange Act and Rule 10b-5 thereunder. Respondents argue that Broumas lacked the necessary manipulative intent to violate Sections 9(a)(1) and 10(b) of the Exchange Act. However, the findings setting out Broumas's admissions of the illegal scheme he had concocted and conclusions do reflect such intent. The evidence shows that Respondent Graham had an "awareness of the underlying facts, not the labels the law places on those facts .... A knowledge of what one is doing and the consequences of those actions suffices." SEC v. Falstaff Brewing Corp., 629 F.2d 62, 77 (D.C.Cir.), cert. denied, 449 U.S. 1012 (1980). Respondent Graham knew that she was assisting Broumas in carrying out his manipulative scheme inasmuch as she possessed a substantial amount of actual knowledge concerning Broumas's activities. For example, Graham knew that: ú Broumas directed her to execute at least 60 over-the-counter trades in JML Class A stock, during the period January 1989 through May 1990, in three separate accounts, involving hundreds of thousands of shares; ú Broumas was an officer of Madison National Bank of Virginia, and a director of James Madison, Ltd; ú the accounts Broumas controlled in 1989 and 1990 at Voss & Co. traded almost exclusively JML stock; ---------FOOTNOTES---------- -[14]-The Order does not charge Respondent Graham with aiding and abetting Broumas's violation of Section 9(a)(2). ==========================================START OF PAGE 50====== ú it was unusual for a customer of Voss & Co. to direct his trades in the manner that Broumas directed his JML trades; ú Broumas provided every detail for each of his directed trades, he requested the specific contra broker for each trade, and his trades were with a small number of contra brokers; ú Broumas had accounts at the other broker-dealers where Broumas directed his trades, that he controlled the JML shares involved in Voss & Co.'s trades with these firms, and that Broumas had connections with these broker-dealers; ú Broumas did not seem to make any money on his trading. This was a red flag from which she should have realized these were illegal wash sales; and he paid both margin interest and commissions on his JML trades; ú Broumas had told Pasztor that he was buying and selling JML Class A stock as a means to borrow money to pay bank loans and he later told Graham the same thing; ú Broumas was having difficulty paying for his JML trades on time, and he had received numerous extensions in his joint account; ú when Voss & Co.'s clearing firm would not let Broumas have any additional extensions in the joint account, Broumas appealed to Voss and was allowed to open another account, Les Girls, in which he continued to trade, through Graham, JML Class A stock; ú despite its title and legal designation, Broumas ordered all of the trades in the Les Girls account, and she considered the account to be Broumas's account; ú Broumas often asked for payment shortly after a sale in his margin accounts, but waited the full five business days, or more, before paying for stock purchases; ú in 1989 and 1990, other than Broumas, the only person who traded JML Class A stock at Voss & Co. was Rogers, a friend of Broumas, and that Broumas ordered the trading in the Rogers account; and ú Broumas was the only one of Graham's customers who always called her with instructions on how and where to complete his trades. ==========================================START OF PAGE 51====== Accordingly, there is ample evidence that Graham was clearly aware of her role in Broumas's manipulative scheme. In fact, she played a central, key role in the scheme. The Commission has found recklessness to be sufficient for purposes of aiding and abetting liability. Raymond L. Dirks, 47 S.E.C. 434, 447 (1981), reversed on other grounds, Dirks v. SEC, 463 U.S. 646 (1983). In Lanza v. Drexel & Co. the Court opined: [T]he inquiry normally will be to determine whether the defendants knew the material facts misstated or omitted, or failed or refused, after being put on notice of a possible material failure of disclosure, to apprise themselves of the facts where they could have done so without any extraordinary effort. 479 F.2d 1277, 1306 n.98 (2d Cir. 1973) (en banc) (emphasis added). Graham failed to make adequate inquiry -- "to apprise [herself] of the facts where [she] could have done so without any extraordinary effort" -- and accordingly acted recklessly under the Lanza test. Registered representatives of broker-dealers are "'under a duty to investigate .... Thus, a salesman cannot deliberately ignore that which he has a duty to know and recklessly state facts about matters of which he is ignorant." Hanly v. SEC, 415 F.2d 589, 595-596 (2d Cir. 1969). The concept of duty to inquire runs throughout the federal securities laws. In the context of supervision, the Commission has said that "[r]ed flags and suggestions of irregularities demand inquiry as well as adequate follow-up and review." Frederick H. Joseph, 54 SEC Docket 283, 291 (1993); see Edwin Kantor, 54 SEC Docket 293 (1993). ==========================================START OF PAGE 52====== In the context of market manipulation, the Commission has stated that "[t]he totality of [the] circumstances at the least placed [the broker] on notice that a searching inquiry was called for as to the nature of the [primary violator's] activity and interest, yet [the broker] made no meaningful investigation. Instead, [the broker] closed his eyes to circumstances indicative of a scheme to create the false appearance of an independent market." Alessandrini & Co., 45 S.E.C. 399, 404 (1973). Graham's conduct demonstrated extreme recklessness: ú In light of all of the things that Graham knew, including her assumption that Broumas maintained accounts at other broker-dealers, Graham was reckless in assuming that wash trading could not be taking place. ú Graham was reckless in executing 60 trades for Broumas in JML Class A stock when she admitted that she knew that he was constantly buying and selling the stock, not making money on his trades, having difficulty paying for them, and believed that Broumas's trading was peculiar. I disagree that Graham fulfilled her duty of inquiry. Resp. Brief at 46. Given her many years in the business, Graham should have inquired what was behind Broumas's conduct. I disagree that she did not know of the impropriety. Id. at 43. ú Graham was reckless in executing Broumas's trades when Graham did not know how a customer might effect a wash trade, and did not know that a wash trade involved trading between two accounts that were owned or controlled by the same customer. This is particularly true where, as here, Graham assumed that Broumas controlled both sides of the trade. ú Graham was reckless in executing Broumas's trades in the Les Girls account, when she knew he was not permitted extensions in the joint account, and that Les Girls was also his account. ú Graham was reckless in executing trades directed by Broumas in an account belonging to Rogers. ú Graham was unaware of the volume reporting requirements for the 60 trades in JML Class A stock which she executed for Broumas. ==========================================START OF PAGE 53====== ú Graham was unsure whether she had reviewed the Voss & Co. compliance manual prior to 1989, and incorrectly believed that the manual addressed the issue of wash trading. ú Graham was reckless in not realizing that all of the above facts led to the conclusion that Broumas's trading was improper. "The importance of a broker-dealer's responsibility to use diligence where there are any unusual factors is highlighted by the fact that violations of the anti-fraud and other provisions of the securities laws frequently depend for their consummation, as here, on the activities of broker-dealers who fail to make diligent inquiry to obtain sufficient information to justify their activity in the security." Alessandrini & Co., 45 S.E.C. at 406 (broker-dealer held to have willfully violated or willfully aided and abetted violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Exchange Act). Graham's defense is based on her claims that she relied on her supervisors, Pasztor and Voss, for guidance and to tell her if trades were improper. Specifically, Graham claimed that Pasztor approved and initialed every directed trade that she executed for Broumas in JML Class A stock in advance of the trade. Her testimony is not credible on this point. Pasztor did not require approval on every trade with Broumas. His endorsement of the tickets after the trades was a ministerial act and had no approval function. Graham's computer screen showed if the Broumas account had a debit. Assuming arguendo that the approvals were obtained, Graham still had to comply with the law ==========================================START OF PAGE 54====== which she did not. Martin Herer Engelman, 59 SEC Docket 1038, at 1057 n.46 (1995); Charles Michael West, 47 S.E.C. 39, 43 (1979). She was reckless in executing Broumas's orders inasmuch as she "failed or refused, after being put on notice of a possible material failure of disclosure, to apprise [herself] of the facts where [she] could have done so without any extraordinary effort." Lanza v. Drexel & Co., 479 F.2d at 1306 n. 98. To constitute substantial assistance, the broker's actions must be a causal factor but not necessarily the sole factor in bringing about the primary violation. See Index Fund, Inc. v. Hagopian, 609 F. Supp. 499, 510 (S.D.N.Y. 1985). Respondent Graham's argument that there was no substantial assistance is insubstantial. Resp. Brief at 49. Broumas's manipulation depended on the willing assistance, recklessness, and knowledge of Graham and other registered representatives. Alessandrini & Co., 45 S.E.C. at 410. Section 21C of the Exchange Act provides that: If the Commission finds, after notice and opportunity for hearing, that any person is violating, has violated, or is about to violate any provision of this title, or any rule or regulation thereunder, the Commission may publish its findings and enter an order requiring such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision, rule, or regulation. 15 U.S.C. 78u-3 (emphasis added). A finding that the respondent aided and abetted a violation also will constitute a finding that the respondent's "conduct was ==========================================START OF PAGE 55====== necessarily a 'cause' under Section 21C of the Exchange Act of a violation of the securities laws." Dominick & Dominick, Inc., 50 S.E.C. at 578 n.11. Because Graham aided and abetted Broumas's violations of Sections 9(a)(1) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder, she also caused the manipulation in violation of Section 21C. Even if Graham had not aided and abetted Broumas's violations, Graham would still have violated Section 21C of the Exchange Act. The "cause" language of this provision includes a "should have known" standard -- classic negligence language. Knippen v. Ford Motor Co., 546 F.2d 993, 1003 (D.C. Cir. 1976). Thus, the negligence standard typically applies in any circumstances where, as here, respondent "should have known" the likely results of her conduct. Accordingly, Graham should have known that Broumas's conduct was illegal. Respondent Voss Failed to Supervise Graham Sections 15(b)(4)(E) and 15(b)(6)(A) of the Exchange Act authorize the imposition of sanctions against broker-dealers and associated individuals who fail reasonably to supervise, "with a view to" preventing violations of the federal securities laws, persons who commit such violations, if such persons are subject to their supervision. Those persons and entities charged with the duty to supervise have the serious responsibility of supervising all operations of a broker-dealer firm. Sutro Brothers & Co., 41 S.E.C. 443, 464 (1963). Failure to supervise has been described as being inattentive to supervisory responsibilities, and failing to learn of ==========================================START OF PAGE 56====== improprieties when diligent application of supervisory procedures would have uncovered them. Anthony J. Amato, 45 S.E.C. 282, 286 (1973). Voss, as president of Voss & Co., notwithstanding red flags, failed reasonably to supervise Graham with a view to preventing her aiding and abetting Broumas's violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. See Edwin Kantor, 51 S.E.C. 441, 446 (1993). His disclaimer of supervisory responsibility and need to know the securities laws in 1989 and 1990 is not credible or in compliance with the law and regulations. On the one hand, he insisted on substantial control of his brokerage firm including requiring daily calls by Pasztor and making decisions with respect to Broumas's trading, on the other hand he appears to abdicate control when some illegal conduct occurs. Thomas F. White, 57 SEC Docket 486, 489 (1994), John H.Gutfreund, 51 S.E.C. 93, 113 (1992). Respondent Voss's argument that he did not have supervisory control over Graham is a filaceous argument. He had control over Pasztor who had control over Graham. If Voss had supervised properly, the wash sales would not have occurred. Voss claimed not to have been familiar with the rules, regulations and laws promulgated by the Commission during his ownership of Voss & Co. because he hired other people to do that. Apr. Tr. 344-45 (Voss). Voss did not believe that he had any obligation to be familiar with the securities laws governing his brokerage business. He claimed to have delegated those duties to people ==========================================START OF PAGE 57====== who were specifically hired for that purpose. Apr. Tr. 345 (Voss). Voss had known Broumas since 1973, and intervened in his behalf when he could not obtain further extensions in his joint account where he was directing his trades. The clearing firm and Pasztor suspected in February 1989 that Broumas might be check- kiting in his account. I do not find credible Voss's denial of knowledge of this or his contention that all authority was delegated to Pasztor. By allowing Broumas to open a second account under Les Girls, Voss overruled Pasztor who wanted to discontinue Broumas's trading and facilitated Broumas's continued trading JML stock at Voss & Co. I do not find Voss's claim that he restricted the Les Girls account credible. Accepting arguendo this contention, the record does not indicate that he properly monitored this restriction arrangement. Voss also overruled Pasztor, as well as the clearing firm, who wished to stop Broumas's trades when Broumas bounced a check in 1990. This was one of many red flags and I find respondents' argument to the contrary insubstantial. Resp. Brief at 54. Voss also knew Broumas directed trades of JML stock in the Roger's account. Voss's general disclaimer of knowledge of the compliance manual, the NASD volume reporting requirements, and whether wash trades in 1989 and 1990 were proscribed by his company, demonstrates his failure to reasonably supervise. Sutro Brothers & Co. 41 S.E.C. at 462-63; John Gutfreund 51 S.E.C. at 110 (1992). ==========================================START OF PAGE 58====== In 1976, Voss as well as Voss & Co. consented to findings by the NASD of violations of the credit extension and customer protection provisions, and the improper selling of mutual fund shares at a discount from the price stated in the prospectus. In 1978, the NASD found that the firm again violated credit extension provisions. Later that same year, Voss and Voss & Co. consented to NASD findings of record keeping and reporting violations, and of failing to file with the NASD a possibly misleading newspaper advertisement. Ex. 701. In 1983, the Commission affirmed NASD findings that Voss & Co., Voss, and Carole Haynes, then vice president, failed to comply with recordkeeping and reporting requirements, gave customers inaccurate statements describing the firm's credit terms in margin transactions, and permitted two individuals to engage in a general securities business at a time when they were not registered to do so with the NASD. Ex. 700; Apr. Tr. 353-55 (Voss). In 1984, the Commission affirmed a $2,000 fine against the firm and a $1,000 fine and five day suspension against Voss. The Commission agreed with the NASD that the firm and Voss charged excessive markups, failed to maintain records and failed to properly review options accounts and transactions. The Commission noted that "the firm and Voss have demonstrated a chronic inability or unwillingness to comply with applicable requirements . . . . This is the fifth NASD disciplinary action against the firm and Voss in the last eight years . . . . [W]e think that the NASD dealt with the firm and Voss too leniently in ==========================================START OF PAGE 59====== light of their prior misconduct." In the Matter of the Application of Voss & Co., Inc., et al., 31 SEC Docket 459, 464 (1984). Ex. 701; Apr. Tr. 353-55 (Voss). At the hearing, Voss claimed not to currently remember any of the actions brought against him by the Commission or the NASD. Apr. Tr. 351-52 (Voss). Appropriate Sanctions Section 15(b)(6)(A) of the Exchange Act empowers the Commission to "censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar such person from being associated with a broker or dealer" if the Commission finds, after notice and opportunity for hearing, that such sanction is in the public interest and such person has, among other things, willfully-[15]- violated any provisions of the Exchange Act or the rules and regulations thereunder. See Sections 15(b)(6)(A)(i) and 15(b)(4)(D). In imposing administrative sanctions, the Commission may ---------FOOTNOTES---------- -[15]-Willfully means only intentionally committing the act which constitutes the violation. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1967): "All that is required is proof that the broker-dealer acted intentionally in the sense that he was aware of what he was doing," quoting 2 Loss, Securities Regulation 1309 (1961); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). It means "no more than that the person charged with the duty knows what he is doing." Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949). Willfulness does not require proof of evil motive. International Shareholders Services Corp., 46 S.E.C. 378, 382 (1976). No showing of an intention to violate the law need be made in order to support a finding of willfulness in an administrative proceeding under the Exchange Act. Id.; A.J. White & Co., 45 S.E.C. 459, 460 n.5 (1974). ==========================================START OF PAGE 60====== take into account such factors as: ...the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that his occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir., 1979), aff'd on other grounds, 450 U.S. 91 (1981). Congress, in writing Section 15(b) of the Exchange Act, viewed past misconduct as the basis for an inference that the risk of probable future misconduct was sufficient to require exclusion from the securities business. Having been directed by the Act to draw that inference whenever our discretion leads us to consider it appropriate, we must do so if the legislative aim is to be attained. Arthur Lipper Corporation, 46 S.E.C. 78, 101 (1975) (citations omitted). The Division requests, considering the lack of contrition, the 60 wash trades, the recklessness involved, and that Graham is employed in the securities industry, that Graham be suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company for a period of nine months and that she be ordered to cease and desist from committing future violations. While I agree with the Division that Graham committed the violations, I agree with the respondents that this sanction is too harsh considering that she received no commissions for the trades, that her supervisors were remiss in reasonably supervising her activities, and that she has no prior disciplinary history. Further, I do not find the collateral bar legally based. Inasmuch as I found that ==========================================START OF PAGE 61====== Respondent Graham aided and abetted violations of Section 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder, she shall be ordered, pursuant to Section 21C of the Exchange Act, to cease and desist from committing future violations of these provisions of the securities law. The Division recommends that Voss be suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company for a period of nine months, with the right to reapply after that time in a non- supervisory, non-proprietary capacity. They predicate this request based on Voss's lack of contrition, his prior disciplinary history, and his attempt to claim a delegation when in fact he retained supervisory control. I agree with the charges against him but I agree with respondents that the sanctions are too harsh given the fact that Pasztor was primarily in charge. I again disagree with the Division's request for a collateral bar as it does not, in my view have a legal basis. Based on the foregoing, the following order is entered. ORDER IT IS ORDERED that Sharon M. Graham be suspended from association with any broker or dealer under Sections 15(b) and 19(h) of the Exchange Act for a period of two months. Graham is ordered under Section 21C of the Exchange Act to permanently cease and desist from committing or causing any violation of, and from committing or causing any future violation of, Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. ==========================================START OF PAGE 62====== IT IS FURTHER ORDERED that Stephen C. Voss be suspended from association with any broker or dealer under Sections 15(b)(6) and 19(h) of the Exchange Act for a period of three months with the right to reapply after that time in a non-supervisory, non- proprietary capacity. This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Rules of Practice. Pursuant to Rule 17(f) of the Rules of Practice, this initial decision shall become the final decision of the Commission as to each party who has not, within fifteen days after service of this initial decision upon him or her, filed a petition for review of this initial decision pursuant to Rule 17(b), unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this initial decision as to him or her. If a party timely files a petition for review, or the Commission takes action to review as to a party, the initial decision shall not become final with respect to that party. Glenn Robert Lawrence Administrative Law Judge Washington, D.C. December 28, 1995 ADMINISTRATIVE PROCEEDING FILE NO. 3-8511 ==========================================START OF PAGE 63====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION December 28, 1995 ______________________________ ) In the Matter of ) ) ERRATUM SHARON M. GRAHAM, et al ) ) ______________________________ The words "with the right to reapply after that time in a non-supervisory, non-proprietary capacity" are hereby stricken from the second paragraph of the "Order" section of the Initial Decision issued in this matter on December 28, 1995. The paragraph should now read as follows: "IT IS FURTHER ORDERED that Stephen C. Voss be suspended from association with any broker or dealer under Sections 15(b)(6) and 19(h) of the Exchange Act for a period of three months." ______________________________ Glenn Robert Lawrence Administrative Law Judge