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SECURITIES AND EXCHANGE COMMISSION
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In the Matter of SANDRA K. SIMPSON
and DAPHNE ANN PATTEE
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OPINION OF THE COMMISSION
BROKER-DEALER PROCEEDING
CEASE-AND-DESIST PROCEEDING
Grounds for Remedial Action
Fraud in the Offer or Sale of Securities
Associated person of broker-dealer defrauded customers by engaging in unauthorized transactions, unauthorized use of margin, unsuitable and excessive trading, churning, and abusive mutual fund sales practices. Held, it is in the public interest for the respondent to be barred from association with any broker-dealer or any member of a national securities exchange or of a registered securities association, ordered to cease and desist from further violations and from causing future violations of the antifraud provisions of the securities laws, ordered to disgorge profits in the amount of $29,516.51 jointly and severally with a co-respondent, and ordered to pay a civil money penalty in the amount of $100,000.
APPEARANCES:
Seth T. Taube, Sidney G. Wigfall, and David J. Held, of McCarter & English, LLP, and Morgan W. Bentley, for Sandra K. Simpson.
Walter Baumgardner, of Musilli, Baumgardner, Wagner & Purcell, P.C., for Daphne Ann Pattee.
Gregory P. von Schaumberg and Kathryn A. Pyszka, for the Division of Enforcement.
Appeal filed: October 12, 1999
Last brief received: May 2, 2002
Oral argument held: February 27, 2002
I.
Sandra K. Simpson, formerly an associated person in the Flint, Michigan office of Prudential Securities, Inc., a registered broker-dealer, appeals from the decision of an administrative law judge. The law judge found that Simpson and her sales assistant, Daphne Ann Pattee, engaged in fraud in the purchase and sale of securities to public customers, in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.1 The law judge barred Simpson, ordered her to cease and desist from committing or causing a violation and from committing or causing any future violations of the antifraud provisions of the Securities Act and the Exchange Act, ordered her to disgorge $34,171, jointly and severally with Pattee, and required her to pay a civil money penalty of $100,000. We base our findings on an independent view of the record, except with respect to those findings not challenged on appeal.
II.
A. Simpson and Pattee worked as salespersons in Prudential's Flint, Michigan office in 1991. While Simpson had been the highest producing broker in the office in 1990, Pattee was struggling. Prudential informed Pattee some time in late 1990 or early 1991 that her "payout," i.e. her share of the gross commissions on transactions, would be reduced because of poor production. Pattee testified that her commission payout rate would have been reduced by approximately one-third.
In early 1991, Pattee offered to work as Simpson's sales assistant for a fixed salary to be paid from Simpson's commissions, and on May 1, 1991, Pattee began to work for Simpson. On that date, Prudential transferred Pattee's customer accounts to Simpson's production number. From then on, Prudential paid all commissions earned with respect to Pattee's former customers to Simpson, and Prudential began deducting Pattee's salary from Simpson'scommissions.2 After May 1991, Simpson controlled Pattee's compensation, work schedule, assignments, and the continuation of her employment.3 Simpson also evaluated Pattee's performance at the direction of the branch manager.
The law judge credited Pattee's version of her work as Simpson's sales assistant, based on Pattee's detailed description of her and Simpson's daily activities and corroborating evidence from other employees, supervisors, and documents. Unlike many sales assistants, Pattee was a registered representative, which allowed her to speak to customers, and to recommend and execute trades for Simpson's customers. Pattee did all these things while working as Simpson's sales assistant. Pattee testified, however, that Simpson directed all of her activities. Pattee also explained that Simpson gave her detailed, daily assignments and closely supervised her work. David Hester, the Flint branch manager, confirmed that Simpson and Pattee worked very closely together on a daily basis. Simpson kept a strict watch on Pattee's activity through daily meetings and frequent and detailed review of Prudential's productivity reports, as well as of trade tickets and confirmations memorializing customer transactions.4
According to Pattee, Simpson directed her to make unauthorized trades, give customers misleading information, and churn accounts. Simpson further urged Pattee to have every customer she serviced open a Command Account with margin. The Command Accounts' margin feature permitted Prudential to extend credit in accounts with insufficient cash or securities to purchase securities.5
Diana Maul, a former Simpson sales assistant, testified that Maul observed Simpson and Pattee review Simpson's accounts toidentify "easy targets." According to both Pattee and Maul, customers who either could not or did not understand their account activity were "easy targets." Pattee and Simpson would identify such targets by executing an unauthorized transaction in an account. If the trade did not provoke a complaint, they had identified an easy target.6 Maul also testified that she helped Simpson move customer documents into Simpson's office in violation of Prudential record-keeping policies.
Pattee testified that Simpson directed her to obtain signed, blank Letters of Authorization ("LOAs").7 Pattee admits completing signed, blank LOAs at Simpson's direction. Maul also testified that Simpson had directed her to forge a customer signature on a LOA a direction Maul refused to obey. She testified further that Simpson directed Maul to obtain LOA forms signed by customers in blank. Simpson kept these LOAs in her office files. Both the solicitation and the retention of the signed, blank LOAs violated Prudential policy.8
From May 1991 until Pattee left Prudential in March 1995, Simpson was the highest (or, for one year, the second-highest) producing broker in the office. In 1995, a series of customer complaints prompted an internal investigation by Prudential. Prudential's investigation implicated Pattee and Simpson in a scheme to defraud customers through churning, unauthorized trades, unauthorized use of margin, and other devices designed to furtherfraudulent conduct, prevent its discovery, or both. Prudential terminated Simpson's employment in May 1995 as a result of its investigation.
B. Simpson had approximately 1600 customers between May 1991 and May 1995, of which only 100 to 200 were active.9 Twenty accounts are involved in this proceeding. Some of the customers dealt primarily with Simpson, while the remainder dealt primarily with Pattee. The trading-practices expert for the Division of Enforcement testified that in her expert opinion all of the customers involved in this proceeding were conservative investors. The Division's expert based her opinion on her review of account-opening documents and customer interviews. On account-opening documents, the customers expressed their interest in safety of principal, income, and similar conservative objectives.10 They were, with one exception, elderly and retired or semi-retired. They were all of modest means, and a few had very small retirement incomes. The activity in the 20 accounts is described below.
1. Because Simpson asserts that Pattee is solely responsible for the violations here, we first examine those of Simpson's customers who dealt exclusively with Simpson.
a. Milton and Bonnie Bain. Milton Bain, an elderly General Motors retiree who did not complete high school, was initially a customer of Pattee's. After Pattee became Simpson's sales assistant, Bain dealt exclusively with Simpson. Bain never requested that either Pattee or Simpson execute any transaction in either of his two accounts.
Between July 1991 and December 1993, there were 35 transactions in the Bains' joint account generating $9,890 in gross commissions. During that period, the purchases for this account totaled $197,483 while its average account equity was only $47,496. Bain noticed the unauthorized transactions in his account. When he complained to Simpson about the numerous unauthorized trades listed on his statements, Simpson always had some sort of explanation. Bain accepted these explanations because he believed Simpson was working in his best interests. Bain testified that he closed the account in 1994, because he concluded that Simpson was using it as a source of commissions.
b. Patricia and Gerald Coutourier. Gerald Coutourier, now deceased, was a retiree with a high-school education. His widowtestified that, because the Coutouriers were inexperienced investors, they trusted Simpson to act in their best interests. In 1992, Gerald Coutourier asked Simpson to diversify his portfolio, which was invested exclusively in General Motors stock. The Coutouriers purchased Coca Cola and Motorola stock.
In February 1995, Simpson telephoned Gerald Coutourier recommending that he sell his Coca Cola and Motorola shares. Patricia Coutourier overheard her late husband's part of the call. The law judge credited Patricia Coutourier's testimony that Gerald Coutourier repeatedly told Simpson that he wanted to keep the Coca Cola stock, but might consider selling the Motorola. After this conversation, the Coutouriers left for a vacation.
Gerald Coutourier discovered that he had cancer at approximately that time. During his illness, Gerald Coutourier received a statement showing the sale of his Coca Cola and Motorola stock. He and his wife worked to reverse the sale of the Coca Cola shares and filed an arbitration claim against Prudential that Prudential settled for $3,000.11
c. Carlis and Doris Williams. Carlis and Doris Williams were elderly retirees; Carlis Williams did not finish high school, but Doris Williams did. On September 24, 1993, Simpson solicited them to purchase shares in Prudential Utility Fund Class A. The law judge credited Doris Williams' testimony that she refused to make the purchase. Despite the refusal, Simpson purchased the shares. Doris Williams received the confirmation, but she did not understand it. When her son explained that the document confirmed that she had purchased the Prudential fund, Doris Williams complained to Hester, the branch manager, about the unauthorized transaction. The fund shares were sold, and Prudential settled the Williams' claim for $442.72. The commissions were charged back to Simpson.
d. Joanne Cardinal. In 1989, Joanne Cardinal opened an account for her mother with Simpson. In 1991, when her mother became incapacitated, Cardinal became her mother's conservator and consolidated all of her mother's assets into one account. At that time, Cardinal informed Simpson about her conservatorship and her mother's incapacity. Joanne Cardinal never called Simpson to request the execution of a specific transaction, and Simpson did not contact her before trading in the account. Simpson possessed LOAs signed in blank for Joanne Cardinal's mother.
In July 1992, Simpson purchased $15,940 of Income Fund of America, Inc. for the account. In February 1993, Simpson purchased an additional $20,000 of Income Fund of America and $20,000 ofWashington Mutual Investors, a fund from the same fund family. Simpson arranged the purchase of mutual funds for Cardinal's mother's account in February 1993 to avoid triggering the funds' published "break points" by purchasing the funds in lots just under the threshold above which the customer would be charged a lower commission.12
Although Simpson was aware of Cardinal's likely immediate need for cash to provide care for her mother, in February 1993, Simpson also purchased $19,557 of Prudential Flexifund Strategy Portfolio and Cardinal's mother's account paid a five-percent sales charge. In April 1993, Cardinal began to withdraw funds from her mother's account in order to pay for increased care for her mother. All of the shares purchased in February 1993 were sold off by December 1994.
e. Evelyn Burdgick. Between May 1991 and March 1995, Burdgick maintained two securities accounts with Simpson. In March 1994, Simpson purchased $258,000 in open-end mutual funds for Burdgick. Simpson arranged the purchases to avoid break points and thereby improperly maximized the brokerage commissions. As a result, Burdgick paid a 5.75 percent sales charge. Simpson failed to request a reduction of the sales charge to 3.5 percent although Burdgick was eligible for the discount.
Simpson asked Hester's advice regarding Burdgick's portfolio. In light of Burdgick's objectives and resources, Hester suggested that Simpson put Burdgick into high-grade corporate bonds. However, in November 1994, Simpson bought an additional $170,000 in four more open-end funds, again avoiding break points that could have reduced sales charges. When Hester saw this purchase, he called Burdgick. Burdgick told Hester that she was not aware of the purchases and had not authorized them.
f. Margie McCoy. Margie McCoy was an elderly retiree. On January 20, 1994, Simpson, McCoy, and McCoy's nephew, Paul Bontrager, met in Simpson's office. Bontrager testified at the hearing. The law judge credited Bontrager's testimony that McCoy directed Simpson to liquidate most of her portfolio except her WalMart stock. After McCoy reached her decision, Bontrager left the meeting. Before McCoy left, Simpson had her sign an individual retirement account ("IRA") distribution form with only her name, address and social security number completed. On January 27, 1994, Simpson liquidated the entire account including the WalMart stock. McCoy protested, tried to havethe transaction reversed, and finally repurchased the shares when Prudential refused to reverse the transaction.13
g. Patricia and Thomas Sheredy. Patricia and Thomas Sheredy, who were elderly retirees, told Simpson they wanted a higher return in their IRAs. The IRAs were invested in FNMA ("Fannie Mae") securities that had been purchased at $1 over their par value. Simpson recommended that they sell their Fannie Maes and purchase higher yielding mutual funds. The law judge credited Patricia Sheredy's testimony that Simpson quoted to her a sales price of $5 over par value as part of her recommendation regarding the Fannie Mae shares. The law judge also credited Patricia Sheredy's testimony that the Sheredys would not have sold the Fannie Mae shares if they had known the actual selling price. The Sheredys agreed to sell at $5 over par and directed that the proceeds be divided "50/50" between two funds recommended by Simpson.14 Simpson sold the Fannie Mae securities at $100.50, or $.50 over par, and invested the proceeds in unequal amounts between the two recommended funds. The Sheredys complained both about the losing sale (from which Simpson had led them to expect a profit of $4.00 over par) and the disposition of the proceeds.15
2. The remaining customers are those customers of Simpson's who dealt primarily with Pattee. The Refices, whose primary contact is not clear from the record, are also in this group.
a. Margie H. Verbal. In 1989, Margie Verbal opened an account with Pattee. The law judge credited Verbal's testimony that Simpson attended a meeting with Pattee and Verbal at which Verbal stated that she had conservative investment objectives and did not want any of her money invested in the stock market. In 1989, Simpson and Pattee induced Verbal to open her account by telling Verbal about an investment product that they claimed was as safe as a CD and promised a nine-percent annual return. Verbal testified that she neverauthorized any additional transactions and did not speak to Pattee or Simpson again. In 1991, Prudential reassigned Verbal's account to Simpson.
Notwithstanding Verbal's instructions to the contrary, between July 1991 and March 1993 there were 19 transactions in Verbal's account generating $1995 in gross commissions. The annualized turnover rate in the account was 5.61.16 The annualized break-even rate of return was 30.98%.17 Ninety percent of the securities in Verbal's account were held for 90 days or less.
In early 1994, Verbal saw that, despite her express wishes to the contrary, her account statement reflected a purchase of WalMart stock in March 1993. Verbal immediately demanded that Pattee sell the securities and close the account. The securities were sold on January 26, 1994. On February 3, 1994, an LOA on which Pattee forged the signature authorized the transfer of $550 from the account of Mr. and Mrs. George Davis -- customers of Simpson's but strangers to Verbal -- to Verbal's account. Verbal had no knowledge of the transfer to her account. On February 22, 1994, Verbal closed her account.
b. George and Dorothy Mae Davis. The Davises were elderly retired customers of Simpson's who dealt primarily with Daphne Pattee. The Davises told Pattee that they wanted only low-risk investments. In November 1992, they gave her $5,000 -- including $3,000 cash which Pattee accepted in violation of Prudential policy -- to deposit in their account. Pattee gave the Davises a receipt for $5,000 but deposited only $4,000 in the Davises' account. On another occasion, the Davises were due to receive a $500 check from their account. Pattee did not send the check. When the Davises demanded an explanation from Pattee, Pattee paid them the $500 with two money orders, instead of a check drawn on their account.
The Davises never requested any specific transaction, and neither Pattee nor Simpson ever called to request trading authorization. Between February 1993 and April 1994, there were 19 transactions in the account, generating $2,823 in gross commissions. The annualized turnover rate was 5.04. The annualized break-even rate of return was 29.69 percent. Seventy percent of the securitiesin the account were held for 90 days or less. The Davis account documents also showed that front-load mutual funds were purchased for the account but were held for only a few months, costing the Davises the sales charges paid to purchase the funds.
In 1993, the Davises' accountant told them that the trading in their account was excessive. They called Simpson from their vacation home and demanded that the activity in their account stop. Simpson assured them that she would "look into" the matter. The trading did not stop. When they returned to Michigan in April 1994, they met personally with Pattee and told her to stop the activity in their account. Only then did the trading stop.
The Davises never discussed the use of margin with Simpson or Pattee or authorized any margin trades. Nevertheless, in April 1994, there was a margin purchase of AT&T stock for $2,700 that cost the Davises $13 in margin interest.
Pattee also admitted that she used forged LOAs to transfer funds without authorization to and from the Davises' account. As discussed above, on February 3, 1994, Pattee forged the Davises' signatures on an LOA transferring $550 from their account to the account of Margie Verbal. In September 1992, there was an unauthorized LOA transfer in the amount of $530 from the Donakowskis' account to the Davises' account. It appears that this transfer was necessary to satisfy a request by the Davises for funds from their account.
c. David and Dixie Donakowski. Pattee acquired the Donakowskis' account in 1990 and transferred it to Simpson in May 1991, although Pattee continued to be the Donakowskis' contact. The Donakowskis trusted Pattee and accepted all of her explanations for the activity in their account. In September 1992, Simpson forged the Donakowskis' signatures on an LOA transferring $530 from the Donakowskis' account to the account of George and Dorothy Mae Davis.
d. Barbara Congdon. In 1988, Barbara Congdon, an elderly retiree, opened an account with Pattee. In 1991, Prudential transferred the account to Simpson. Congdon told Pattee that she had conservative investment objectives. Congdon called Pattee only once to request a specific purchase of a mutual fund and authorized no further transactions. Congdon could not understand the transaction confirmations or account statements that she received from Prudential.
Between March 1993 and April 1994 there were 31 transactions in Congdon's account, generating $4,484 in gross commissions. The annualized turnover rate was 3.66. The annualized break-even rate of return was 17.88 percent. Fifty percent of the securities in her account were held for 90 days or less. The Congdon account documents also showed that mutual funds were purchased for the account but were held for only a few months, effectively forfeiting the sales charges paid by Congdon when she purchased the funds.
Congdon agreed to open a Command Account with its margin feature because Pattee told her it was free, but she did not understand what margin was and never authorized any margin transactions. She did not want to borrow money to purchase securities. Between March 1993 and April 1994, there were margin transactions in her account, and she was charged $448 in margin interest and fees.
While Congdon admitted that she earlier had signed blank LOAs, she insisted that she did not sign an LOA used on May 21, 1991. Pattee admitted that she forged Congdon's signature on the May 21, 1991 LOA, and arranged the transfer of $1,000 from Congdon's account to an account that the LOA identified as belonging to an unnamed "sister-in-law."18 Congdon denied any knowledge of the transfer.
Congdon complained frequently to Simpson about Pattee. When Congdon demanded that Pattee close her account, Pattee claimed that Congdon could not have her money right away because the account funds were invested in three different companies. Pattee urged Congdon to wait a month so that she would receive a dividend on one of her investments. Congdon received some of the proceeds from her account in two checks, but did not receive the entire $41,000 she thought was in her account, nor did she receive the promised dividend. It appears that the decreased account value reflected trading losses and commission charges. When Congdon complained, Pattee, Simpson, and Hester each told her that they could not help her because she already had received payment of the entire balance in the account.
e. Beverly Look. Beverly Look, an elderly retiree, had one brief meeting in 1988 with Pattee when Pattee took over Look's account. Thereafter, Look had little contact with her. In 1991, Simpson became the registered representative for Look's account. Look spoke to Simpson a few times when Simpson took over the account. Look never asked Pattee or Simpson to execute a trade, and they never called her for trading authorization.
Between March 1991 and January 1995, 25 transactions in the account generated $2,911 in gross commissions. The annualized turnover rate was 2.10. The annualized break-even rate of return was 12.01 percent. Fifty-seven percent of the securities in the account were held for 90 days or less. In addition, mutual funds with loads were purchased for the account but held in the account for only a few months, leading to a virtual forfeiture of the sales charges.
In February 1995, Look and her son met with Simpson and Pattee and told them that the trading in the account was excessive and to slow down the trading. From then on the account was dormant.
f. Donald James Watters. Donald Watters is a retiree with a high school education. His account-opening forms listed "speculation" among his otherwise conservative investment objectives.19 Watters had both a securities account and an IRA. Watters never discussed Command Accounts or margin with Pattee. The law judge accepted the testimony of the Division's handwriting expert that Simpson forged Watters' signature to open Watters' Command Account with a margin feature.
Pattee admitted that she executed unauthorized trades and margin transactions in Watters' accounts. Between October 1991 and January 1995, there were 20 transactions in Watters' IRA generating $5,178 in gross commissions. The annualized turnover rate was 2.22. The annualized break-even rate of return was 13.88 percent. Between April 1994 and January 1995, there were 14 transactions in Watters' securities account, some of which were margin trades. The activity in Watters' securities account generated $3,736 in gross commissions. Watters was charged $1,656 in margin interest and fees and had a margin balance in 1994 of $34,000. The annualized turnover rate was 4.37. The annualized break-even rate of return was 24.75 percent. Sixty-seven percent of the securities in the account were held for 90 days or less. Again, mutual funds were purchased for the account but were held for only a few months, costing the account the sales charges for purchasing the funds.
g. Audrey Kindell. Audrey Kindell, an elderly widow employed part-time in a realty office, maintained both a securities account and an IRA. She was an extremely conservative investor living on a small retirement income, for whom the purchase of any speculative security would be unsuitable. However, at least two of the stocks purchased for Kindell's portfolio were unsuitably speculative: one, Lear Seating Corp., was purchased shortly after its initial public offering and the other, Weirton Steel, had suffered well-documented, recent financial troubles.
In 1994, Kindell's securities account was changed to a Command Account with a margin option. Kindell never discussed margin with Pattee or Simpson and did not authorize the Command Account. The signature on the Command Account form was misspelled and forged.20 Kindell never ordered any specific trades and complained several times regarding the unauthorized activity in her account.
Between March 1994 and January 1995, there were 13 transactions in Kindell's securities account generating $2,250 in gross commissions and $148 in margin interest and fees. The annualized turnover rate was 8.09. The annualized break-even rate of return was 54.95 percent. Sixty-seven percent of the securities in her account were held for 90 days or less. Between July 1993 and January 1995, there were 20 transactions in Kindell's IRA, generating $3,242 in gross commissions. The annualized turnover rate was 4.24. The annualized break-even rate of return was 22.54 percent. Mutual funds with sales loads were purchased for Kindell's account but were held for only a few months. For example, the Salomon Brothers 2008 Worldwide Dollar Government Term Trust was held for only 60 days. Similarly, the Prudential High Yield Fund: Class B was held for only 133 days. In both instances, the short holding periods caused Kindell to forfeit the sales charges.
h. James and Mary Jane Corder. In 1992, the Corders, elderly retirees, opened an account with Simpson. However, they frequently dealt with Pattee because Simpson was "never available." They relied completely on Simpson and Pattee for investment advice. Neither Simpson nor Pattee ever called them to authorize a trade. The Corders never discussed margin with Pattee or Simpson, or authorized a margin account. However, a Command Account with a margin feature was opened in their names. The signature on the Command Account application was an unattributed forgery. The Corders were charged $240 in margin interest and fees.
Between July 1993 and October 1994, there were 16 trades in the Corders' account generating $2,237 in gross commissions. The annualized turnover rate was 2.55. The annualized break-even rate of return was 11.98 percent. Ninety percent of the securities in their account were held for 90 days or less. In addition, mutual funds with sales loads were purchased for the account but were held for only a few months.
i. Norman and Margaret Cooper. The Coopers, elderly retirees, were conservative, unsophisticated, and inexperienced investors. They initially opened a joint securities Command Account and later opened two IRAs. They occasionally called Pattee to order specified trades. However, neither Pattee nor Simpson called them to request authorization for the remaining trades in the account.
Between May 1991 and March 1992, there were unauthorized transactions in the Coopers' securities Command Account generating $5,254 in gross commissions.21 The Coopers never spoke to either Simpson or Pattee about margin, nor did they authorize the use of margin. However, some of the unauthorized transactions were margin trades generating $1,646 in margin interest. The annualized turnover rate was 4.46. The annualized break-even rate of return was 33.46 percent.
Over $7,000 from the Coopers' securities account was transferred to other accounts without the Coopers' permission, using forged LOAs. On June 18, 1991, a forged LOA transferred $6,500 to an account in the name of "Robbins." On February 13, 1992, a forged LOA transferred $564.98 to an account in the name of "Winfrey."22
The Coopers' accountant advised them that their account was being churned. The Coopers complained to Hester, the branch manager, and then confronted Pattee. Neither Pattee nor Hester notified Simpson of the complaint, and Hester never entered it in the branch-office complaint log.23 Pattee agreed to repay the Coopers for the costs caused by the churning and did so with a series of $1,000 money orders over a six-month period.
j. Pauline, Ronald, and Clarence Mathis. Pauline Mathis, an elderly widow, completed the ninth grade. Mathis did not understand her account statements and did not have any investment experience.24 Mathis told Pattee that she did not want to invest in stocks. Mathis never placed any orders with Prudential for securities, and never authorized the establishment of a margin account or any margin trades. The Division's handwriting expert opined that Simpson forged Mathis' signature on the opening documents for a Command Account with a margin feature.
Between May 1991 and December 1994, there were 55 transactions in the Mathis account generating $13,692 in gross commissions and $1,888 in margin interest and fees. The annualized turnover rate was 3.31. The annualized break-even rate of return was 19.99 percent. Pattee also purchased mutual funds with a front-end load for the account but held them for only a few months.
Over the life of Mathis' account, unauthorized and forged LOAs resulted in transfers from Mathis' account that totaled over$4,000.25 There was an undated $800 LOA transfer from Mathis' account to an account in the name of "Burns," falsely identified as Mathis' sister.26 On September 10, 1991, there was a $465 LOA transfer from Mathis' account to an account in the name of "Haskins," also falsely identified as Mathis' sister. On March 1, 1993, there was a $2,000 LOA transfer from Mathis' account to an account falsely identified as belonging to Mathis' sister; the account number on this LOA refers to the Donakowskis' account. On October 26, 1993, there was a $750 LOA transfer from Mathis' account to an account in the name of "Jourdin."
k. Raymond and Evelyn Trudell. Pattee became the registered representative on the Trudells' account in 1989, and they dealt exclusively with her. Pattee began making unauthorized trades and unauthorized margin trades in their account as early as 1990. Prudential transferred the account to Simpson in 1991. Between February 1994 and January 1995, there were 23 trades in the Trudells' account generating $6,370 in gross commissions and $1,956 in margin interest and fees. The annualized turnover rate was 4.07. The annualized break-even rate of return was 21.12 percent. Fifty-five percent of the securities in the account were held for 90 days or less.27
The Division's expert determined that Simpson forged the signature on an April 8, 1993 LOA transferring $3,000 from the Trudells' account to an account owned by other customers of Simpson's. The forged LOA falsely identified this account as belonging to a Trudell family member.
l. Lela M. Phelps. Lela Phelps was an unsophisticated investor who did not understand her account statements. Pattee became the registered representative for the account in 1990. Prudential transferred the account to Simpson in 1991. Phelps always followed Pattee's recommendations, and, more often, Pattee made trades in the account without Phelps' authorization.
Between September 1993 and August 1994, there were 11 trades in the account generating $1,701 in gross commissions. The annualized turnover rate was 5.24. The annualized break-even rate of return was32.79 percent. Eighty-three percent of the securities in the account were held for 90 days or less.
m. Raymond and Kathleen Refice. The Refices were a young couple saving for their retirement and their children's education. They were conservative investors: they wanted to invest their money and leave it alone, relying on long-term growth to meet their goals. They opened their accounts with Simpson. Neither Refice testified.
In the Refices' joint account between July 1993 and December 1993 there were 4 transactions generating $214 in commissions. The annualized turnover rate was 4.21. The annualized break-even rate of return was 28.09 percent.
In one child's custodial account, between July 1993 and December 1993 there were 9 transactions generating $1,341 in commissions. The annualized turnover rate in the account was 5.91. The annualized break-even rate of return was 31.97 percent.
In the other child's custodial account, between July 1993 and December 1993, there were nine transactions generating $1,412 in gross commissions. The account's annualized turnover rate was 5.91. The annualized break-even rate of return was 33.35 percent. Seventy-five percent of the securities in this account were held for 90 days or less.
The Refice account documents also demonstrate that mutual funds with a front-end load were purchased for all three accounts but were held for only a few months. This caused a forfeiture of the sales charges paid by the Refices when they purchased the funds. For example, units of Government Securities Equity Trust Series B were purchased for the custodial accounts but were held a little over one month. Similarly, units of Prudential Utility Fund Class A, which carried a sales load, were purchased for the joint account but were held for less than four months.
III.
A. Simpson has consistently argued that Pattee, and only Pattee, is responsible for all of the wrongdoing in this case. However, certain customers dealt exclusively with Simpson. As discussed below, we find that Simpson engaged in unauthorized and unsuitable trading in these accounts and made misrepresentations to certain customers in violation of Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5.
The fact that some of Simpson's customers dealt with Pattee, moreover, does not exonerate Simpson. Persons with knowledge of a fraud who assist in its perpetration are primary violators, as though they perpetrated the fraud directly.28 We find that Simpsondefrauded the customers whose accounts she herself handled. Because we also find that Simpson had knowledge of and actively directed Pattee's anti-fraud violations, we find Simpson was a primary violator with respect to Pattee's violations.29
Simpson claims she was unaware of Pattee's activity or -- a significant concession -- of its breadth. However, the record demonstrates that Simpson controlled their working relationship, including exercising direct control of Pattee's compensation and indirect control of Pattee's continued employment.30 Simpson engaged in close and exacting supervision of Pattee's daily work, assigning her tasks, instructing her on the best means to complete the assignments, and monitoring her progress. Credible testimony also establishes that Simpson participated directly in Pattee's fraudulent conduct, by discussing with Pattee which customers were "easy targets" for their fraudulent scheme and how best to exploit them.
Simpson was the primary beneficiary of their schemes because she received the commissions on the account activity, while Pattee received a salary paid out of Simpson's commissions. Simpson's contention that she was unaware of the "breadth" of Pattee's unlawful activity is further undermined by Hester's testimony that Simpson paid close attention to the trade tickets, confirmations, and commission reports provided to her by Prudential with respect to her customers. Even cursory attention to the reports would have made Simpson notice the unusual level of trading -- and consequent commissions -- from the customers Pattee serviced. This activity was attributed to conservative customers, who generally were retired and of limited means, from whom such activity should have been surprising. If the commission and activity reports did not alert Simpson, the customer complaints from Davis, Look, and other customers serviced by Pattee should have. Simpson never investigated or brought the complaints to Hester's attention until Pattee had left and the scheme had begun to unravel on its own.31
Simpson's actions also indicate her involvement in the efforts to cover up the fraudulent scheme. Contrary to Prudential procedures, Simpson routinely kept customer records in her personal office. Again contrary to Prudential requirements, Simpson acquired and kept signed (but blank) LOA forms for use in transferring funds among her accounts. When Simpson could not obtain actual signed, blank LOA forms, she would forge customer signatures to the forms herself, or, according to Maul, ask others, including her sales assistant, to do so.32
Simpson accuses Pattee of lying regarding Simpson's activities. The law judge credited Pattee's extensive and detailed testimony regarding her work relationship with Simpson, and Simpson has presented no substantial evidence to us suggesting that we alter his credibility finding.33 Pattee's testimony is further bolstered by her admissions regarding her own conduct. At the hearing, Pattee was forthcoming about the scope of her misconduct. When Pattee testified, she implicated Simpson, but she also implicated herself, which enhances her credibility because it is deemed unlikely thatPattee would untruthfully implicate herself in activity that could expose her to civil or criminal liability.34
Hester and Maul corroborate Pattee's testimony about a close working relationship between Pattee and Simpson and, in the case of Maul, about obtaining and forging blank LOAs.35 Simpson attacks the credibility of Hester and Maul, alleging that they bear grudges against her. The law judge heard that argument, observed their demeanor, and credited the testimony. We also note that Simpson has not attacked the credibility of the customer witnesses.
B. A broker who trades in a customer's account without authorization commits fraud if there is accompanying deceptive conduct.36 The deceptive conduct element is met when the broker omits "to inform the customer of the materially significant fact of the trade before it is made."37
The record establishes that, from May 1991 through May 1995, Simpson, acting independently of Pattee, conducted unauthorized trading in the following accounts: Milton and Bonnie Bain (approximately 35 unauthorized transactions between July 1991 and December 1993), Patricia and Gerald Coutourier (sale of Coca Cola stock), Carlis and Doris Williams (September 1993 purchase of Prudential Utility Fund Class A shares contrary to instructions), Margie McCoy (sale of WalMart shares), and Patricia and Thomas Sheredy (FNMA securities sold at price other than price quoted, and proceeds of sale misallocated).
We find that Simpson and Pattee acted in concert to conduct unauthorized trading in the following accounts: Margie H. Verbal (approximately 19 unauthorized transactions between July 1991 and March 1993), George and Dorothy Mae Davis (approximately 19 unauthorized transactions between February 1993 and April 1994),Barbara Congdon (approximately 31 unauthorized trades between March 1993 and April 1994), Beverly Look (approximately 25 unauthorized trades between May 1991 and January 1995), Donald James Watters (approximately 14 unauthorized transactions between April 1994 and January 1995 in securities account, approximately 20 unauthorized transactions between October 1991 and January 1995 in IRA), Audrey Kindell (approximately 13 unauthorized transactions between March 1994 and January 1995 in securities account and approximately 20 unauthorized transactions between July 1993 and January 1995 in IRA), Norman and Margaret Cooper (unauthorized transactions between May 1991 and March 1992), James and Mary Jane Corder (approximately 16 unauthorized trades between July 1993 and October 1994) Pauline, Ronald, and Clarence Mathis (approximately 55 unauthorized transactions between May 1991 and December 1994), Raymond and Evelyn Trudell (approximately 23 unauthorized transactions between February 1994 and January 1995), and Lela M. Phelps (approximately 11 unauthorized transactions between September 1993 and August 1994).
Simpson argues that, because each of the customers received monthly statements and other forms notifying them of the transactions but filed no complaints, the customers have ratified the trades. Simpson is mistaken. Several customers including, for example, Bain, the Coutouriers, McCoy, Williams, the Sheredys, the Davises, Congdon, and Look, vigorously protested unauthorized or excessive trading in their accounts. Moreover, we have held repeatedly that after-the-fact "acceptance" of an unauthorized trade does not transform that transaction into an authorized trade.38
C. Pattee testified that she and Simpson made unauthorized margin transactions to generate commissions in accounts that lacked securities to sell or ready cash to allow the purchase of securities. Simpson stated that all of the Command Accounts she opened were automatically designated as margin accounts. Simpson directed Pattee to avoid any mention of the margin feature in Command Accounts and the risks of margin for investors.39 Few, if any, of the customers were aware of or understood the margin feature. Moreover, Corder and Kindell each testified that the signatures on the Command Accountforms were not theirs, and the Division's expert testified that the customer signatures on the Watters and Mathis Command Account papers were forged by Simpson.
The following customers had unauthorized margin transactions in their accounts: Barbara Congdon, Donald Watters, Audrey Kindell, James and Mary Jane Corder, Norman and Margaret Cooper, George and Dorothy Mae Davis, Pauline, Ronald, and Clarence Mathis, and Raymond and Evelyn Trudell.
D. Investment recommendations must be suitable for the investor when evaluated in terms of the investor's financial situation, tolerance for risk, and investment objectives.40 A broker can violate his duty to provide suitable recommendations to his or her customers -- and consequently the antifraud provisions of the securities laws -- by making unauthorized unsuitable transactions.41 All of the customers involved in this case were conservative investors.42 As individuals of modest means, they sought safety of principal, low risk, income, and liquidity. The money they invested with Simpson was money that they did not want to risk and could not afford to lose.
Suitability often focuses on whether a particular investment product is suitable for an investor, but the frequency of trading must also be suitable.43 For investors with conservative investment objectives, selling one security and immediately replacing it with another which is then sold, is excessive when it leads to depletion of capital.44
We have previously held that there are several tests to determine whether trading in an account is excessive, including the following: the annualized turnover rate, the annualized break-even rate of return, and the number of days a security is held in an account. In light of the situation and financial goals of these customers, annualized turnover rates in these accounts ranging from 2.10 to 8.09 and annualized break-even rates of return ranging from 11.98 percent to 54.95 percent are excessive.45 Moreover, a majority of the securities were held for less than 180 days, further supporting a conclusion that trading was excessive. This conclusion is bolstered by the unauthorized nature of many of the trades and the fact that some customers were extremely reluctant to do any trading at all. For example, Verbal did not want to invest in the stock market at all; she thought she was purchasing something as safe as a CD, but paying a high rate of interest. Instead, without her authorization, her account had an annualized turnover rate of 5.61 and an annualized break-even rate of return of 30.98 percent.
The trading in 16 of the 20 accounts at issue was excessive in terms of the turnover rate and the break-even rate of return. Those accounts were those of Raymond and Kathleen Refice (joint account and two custodial accounts); Margie Verbal; George and Dorothy Mae Davis; Barbara Congdon; Beverly Look; Donald James Watters (securities account and IRA); Audrey Kindell (securities account and IRA); Jamesand Mary Jane Corder; Norman and Margaret Cooper; Pauline, Ronald, and Clarence Mathis; Raymond and Evelyn Trudell; and Lela M. Phelps.
The accounts of Cardinal, Congdon, Corder, Davis, Kindell, Look, Mathis, Refice and Watters showed inappropriate short-term trading of front-end loaded mutual funds which caused a forfeiture of the sales charges paid by the customers when the funds were purchased. These were not suitable transactions for conservative investors.
The use of margin in the accounts of George and Dorothy Mae Davis; Barbara Congdon; Donald Watters; Margery Kindell; James and Mary Jane Corder; Norman and Margaret Cooper; Pauline, Ronald, and Clarence Mathis; and Raymond and Evelyn Trudell, all of whom were conservative investors, was unsuitable given their modest means, ignorance of the risks involved, and their general lack of investment sophistication.46
E. "Churning occurs when a securities broker buys and sells securities for a customer's account, without regard to the customer's investment interests, for the purpose of generating commissions."47 The three elements of churning are control -- either actual or de facto -- of the account by the broker; excessive trading; and scienter on the part of the broker.48 Churning violates the antifraud provisions of the securities laws and is distinct from "excessive trading."49
None of the customers gave Simpson or Pattee actual discretionary trading authority in their accounts. We have found de facto control sufficient to find churning when the broker controlled the account either because the customer relied on her, or because the customer was incapable of controlling the account. Here, both factors apply. De facto control was shown by the many unauthorizedtransactions and the customers' general lack of investment knowledge and sophistication, which left control of the account in the hands of Simpson. The record establishes that Simpson controlled the following accounts: Barbara Congdon, Norman and Margaret Cooper, James and Jane Corder, George and Dorothy Davis, Audrey Kindell (both securities and IRA), Beverly Look (IRA), Pauline, Ronald, and Clarence Mathis, Lela Phelps, Raymond and Evelyn Trudell, Margie H. Verbal, and Donald Watters (both securities and IRA).50 As discussed above, the trading in these accounts was excessive.51
The Division's trading practices expert testified that maximizing commissions was the only explanation for the trading pattern in the controlled accounts. Simpson denies that she churned the accounts, but she does not suggest an alternative explanation for the frequency of trading in the accounts. Nor, in light of our finding that Simpson acted in concert with and directed Pattee, does Pattee's participation in some of the excessive trading insulate Simpson. Simpson's control over the accounts handled by Pattee, Simpson's inability to explain the trading pattern, and Simpson's status as the primary beneficiary of the commissions generated by the excessive trading prompt our finding that Simpson acted with scienter.
In light of the above findings we conclude that, with the exception noted above,52 Simpson churned the accounts at issue in violation of the antifraud provisions of the securities laws.
F. As part of the fraudulent scheme, Simpson acting independently and in concert with Pattee used various deceptive techniques to effectuate the scheme and prevent the discovery of the fraud by the customers and Prudential. Simpson made misrepresentations to the Sheredys about the price of the FNMAs toinduce them to sell and to Milton Bain regarding the unauthorized transactions in his accounts.53
To cover up account shortages that would have provoked complaints from customers and inquiry by Prudential, Simpson used forged LOAs and executed but unauthorized LOAs to transfer approximately $20,000 of client funds among customer accounts without customer authorization. Simpson and Pattee defeated Prudential's internal controls by obtaining (or, in some cases, forging) LOAs and hiding them in their offices and then lying to supervisors and cashier employees regarding relationships between the parties to the transfers effected by the unauthorized LOAs. These efforts at deception permitted Simpson's and Pattee's fraudulent schemes to escape detection for four years, and are additional evidence that Simpson acted with scienter.
* * * *
Accordingly we find that Simpson willfully violated Securities Act Section 17(a) and Exchange Act Section 10(b) and Exchange Act Rule 10b-5.
IV.
A. Simpson argues that the law judge erred in applying a preponderance-of-the-evidence standard of proof. Simpson argues that, because a decision against Simpson would in all likelihood deprive her of her ability to make a living in the securities industry, a higher standard of proof should apply. However, the Supreme Court has held that preponderance of the evidence is the proper standard of proof in the Commission's administrative proceedings.54 At oral argument, Simpson's counsel invited the Commission to exercise its administrative discretion to depart from the Steadman standard when an individual may be permanently barred. We decline that invitation. To mandate that any misconduct for which the Division seeks a permanent bar must be proved by clear and convincing evidence would compromise the Commission's ability to protect public investors by, among other things, putting those respondents whose misconduct has been proven by a simple preponderance of the evidence beyond the reach of a permanent bar, however egregious the misconduct. This result would be inconsistent with our duty to protect the public.
B. Simpson claims that the law judge barred cross-examination of witnesses regarding alleged improper contact with several witnesses by Division counsel. Simpson mischaracterizes the law judge's ruling. Simpson alleged in a pre-hearing submission that Division counsel had in some way "poisoned the well" or otherwise improperly "shaped" witness testimony in the course of pre-hearing interviews. However,at a pre-hearing conference about these allegations, counsel for Simpson admitted that he had not investigated the claims made by his client before asserting in a pleading that Division counsel had acted improperly. The law judge advised Simpson's counsel that, if counsel wished to present testimony on that subject, he first would have to make a proffer of the expected testimony. Simpson, therefore, was not barred from cross-examination on the allegation, and, in fact, Simpson cross-examined Division witness Paul Bontrager, McCoy's nephew, on precisely that topic. When Simpson attempted on direct to examine another witness regarding this contention without making a proffer as directed, the Division objected, and the law judge sustained the objection. Simpson did not then, or later, make any proffer as required by the judge's pre-trial ruling. We find that the law judge ruled appropriately and in any event, did not, as alleged by Simpson, limit cross-examination on that subject.55
V.
Simpson argues that a bar from association with a broker or dealer, a member of a national securities exchange, or a national securities association and $100,000 civil money penalty are excessive given her assertedly relatively minor role in the wrongdoing. Simpson argues that, at most, she is responsible for some actions which Simpson's brief characterizes as "miscommunications" with her customers.
The imposition of sanctions is, as the Supreme Court has held, peculiarly within an administrative agency's expertise.56 Section 15(b)(6)(A)(i) of the Exchange Act authorizes the Commission to bar any associated person of a broker-dealer who willfully violates the Securities Act, the Exchange Act or any rule thereunder if it is inthe public interest.57 Section 21B of the Exchange Act authorizes the Commission to impose civil penalties on persons who willfully violate the Securities Act, the Exchange Act or a rule thereunder.58 Similarly Exchange Act Section 21C authorizes the Commission to impose a cease-and-desist order on persons who willfully violate the Exchange Act or a rule thereunder.59
For four years, Simpson engaged in a wide variety of sales-practice violations and directed Pattee to engage in additional violations in flagrant and persistent disregard of her customers' interests. During the fraudulent scheme, Simpson engaged in numerous activities to deceive her customers and employer regarding her activities and directed Pattee to do likewise. Because of Simpson's unlawful actions, Simpson's customers had their limited funds dissipated through payment of commissions, sales charges, and margin interest. Since the discovery of the fraudulent scheme, Simpson has made every effort to blame Pattee for the entire scheme. We conclude that Simpson should be barred from associating with any broker-dealer, and any member of a national securities exchange or of a registered securities association. We conclude further that Simpson should pay a civil money penalty of $100,000. Simpson has not appealed the imposition of a cease-and-desist order.
The portion of the disgorgement attributable to the commissions earned by Simpson from the 14 accounts ($28,316.79) which were subject to churning or other violative conduct, including unauthorized transactions, is supported by the record.60
The law judge ordered Simpson to disgorge an additional $5,893 that he attributed to commissions Simpson earned on the "unauthorized, unsuitable and improper trades" in the Burdgick, Coutourier, Cardinal, McCoy, Sheredy, and Williams accounts. We have not been able to identify the commissions earned by Simpson regarding the July 1992 purchase of mutual funds for the Cardinal account. It further appears that Simpson has been deprived of her ill-gotten gains from the Carlis and Doris Williams unauthorized trades, because Prudential charged back to Simpson the commissions related to the unauthorized transaction.
We find $5,452.42 in commissions attributable to unlawful acts by Simpson in the Burdgick, Coutourier, Cardinal (February 1993 purchase of Prudential FlexiFund Strategy Portfolio Class A), McCoy, and Sheredy accounts. We add this amount to the $28,316.79 already assessed, to make a total of $33,769.21 to be disgorged jointly and severally by Simpson and Pattee.61
Daphne Pattee did not appeal from the initial decision of the administrative law judge, and the time for such appeal has expired. Accordingly, the decision of the law judge as to Pattee has become final, except that the amount of disgorgement assessed, jointly and severally with Simpson, is reduced in accordance with this opinion.
An appropriate order will issue.62
By the Commission (Chairman PITT and Commissioners HUNT and GLASSMAN).
Jonathan G. Katz
Secretary
Admin. Proc. File No. 3-9458
In the Matter of SANDRA K. SIMPSON
and DAPHNE ANN PATTEE
|
: |
ORDER IMPOSING REMEDIAL SANCTIONS AND NOTICE OF FINALITY
On the basis of the Commission's opinion issued this day, it is
ORDERED that Sandra K. Simpson ("Simpson") be barred from association with any broker-dealer, or with a member of a national securities exchange or of a registered securities association; and it is further
ORDERED that Simpson cease and desist from committing or causing any violation and committing or causing any future violation of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and it is further
ORDERED that Simpson disgorge her illegal profits jointly and severally with Daphne Pattee in the amount of $33,769.21 plus prejudgment interest from April 1, 1995, through the last day of the month preceding the month in which payment is made at the rate of interest established under Section 6612(a)(2) of the Internal Revenue Code, 28 U.S.C. § 6612(a)(2), compounded quarterly, pursuant to Rule 600 of the Commission's Rules of Practice.; and it is further
ORDERED that Simpson pay a civil money penalty of $100,000.
Notice is hereby given, pursuant to Rule 360(e) of our Rules of Practice that the initial decision of the administrative law judge,* as modified herein, with respect to Daphne Ann Pattee ("Pattee") has become the final decision of this Commission by operation of Rule 360(d)(1) of our Rules of Practice. The order contained in that decision (1) bars Pattee from being associated with any broker-dealer or a member of any national securities exchange or registered securities association; (2) directs Pattee to cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, or Rule 10b-5 promulgated thereunder; and (3) imposes a civil penalty of $50,000 on Pattee; That order is hereby declared effective. To the extent the initial decision orders Pattee to pay disgorgement, that order is modified to provide that Pattee shall, jointly and severally with Simpson, disgorge $33769.21 plus prejudgment interest from April 1, 1995, through the last day of the month preceding which payment is made at the rate of interest established under Section 6612(a)(2) of the Internal Revenue Code, 28 U.S.C. § 6612(a)(2), compounded quarterly, pursuant to Rule 600 of the Commission's Rules of Practice.
Simpson's and Pattee's payments of the civil money penalty and disgorgement shall be: (i) made by United States postal money order, certified check, bank cashier's check, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549 within thirty days of the date of this order; and (iv) submitted under cover letter which identifies Simpson as the respondent in this proceeding, and the file number of this proceeding. A copy of this cover letter and check shall be sent to Gregory P. von Schaumberg, Counsel for the Division of Enforcement, Securities and Exchange Commission, Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and it is further
ORDERED, that within sixty (60) days after payment of funds or other assets, in accordance with the disgorgement required by this Order, the Division of Enforcement shall submit a proposed plan for the administration and distribution of disgorgement funds in accordance with Rule 610 of our Rules of Practice.
By the Commission.
Jonathan G. Katz
Secretary
___________________________
| 1 | 15 U.S.C. §§ 77q(a) and 78j(b), 17 C.F.R. § 240.10b-5. Pattee did not appeal the Initial Decision, and the time for appeal has expired. The order accompanying this opinion makes the Initial Decision of the administrative law judge, as herein modified, final as to Pattee. |
| 2 | Pattee's monthly salary of $3,000 depended, at least formally, on her production of at least $3,000 to $5,000 in commissions each month. However, Simpson testified that Pattee received the full salary even when her production did not meet the target figure. |
| 3 | Although Simpson could not discharge Pattee on her own authority, she could ask to be "disassociated" from Pattee. That request would have effectively ended Pattee's employment at Prudential. |
| 4 | Of course, the commissions earned by Pattee's efforts were credited to Simpson, so in monitoring her own compensation Simpson would have been aware of the commissions produced for her by Pattee. |
| 5 | In addition, Prudential had contests rewarding registered representatives who opened the most Command Accounts. Simpson often won valuable prizes in these contests. |
| 6 | The following were identified as easy targets among the Simpson customers involved in this case: Milton and Bonnie Bain; Evelyn Burdgick; Barbara Congdon; Norman and Margaret Cooper; James and Jane Corder; George and Dorothy Davis; David and Dixie Donakowski; Audrey Kindell; Beverley Look; Pauline Ronald and Clarence Mathis; Margie McCoy; Lela Phelps; Raymond and Evelyn Trudell; and Donald Watters. |
| 7 | An LOA is a Prudential form that, when signed by the customer, directs Prudential to transfer funds or securities between accounts. |
| 8 | During a subsequent investigation of Simpson's and Pattee's activities described below, Prudential's investigator discovered customer files and signed, blank LOAs retained in Simpson's office in violation of Prudential policies.
Contrary to Simpson's suggestion in her brief, Prudential's investigator did not confuse documents from Pattee's and Simpson's files when he made the search. The investigator directed Simpson to move any files of Pattee's out of her office, and when Simpson completed that removal, he secured Simpson's office and searched it in her absence. |
| 9 | For the quarter ended December 31, 1992, Simpson had approximately 200 active accounts. For the quarter ended December 21, 1993, Simpson had approximately 185 active accounts. For the quarter ended December 31, 1994, Simpson had approximately 240 active accounts. |
| 10 | But see n.19 infra. |
| 11 | While Simpson asserted that she thought Gerald Coutourier had authorized the sale, the law judge observed in his decision that his credibility finding regarding Patricia Coutourier's testimony was corroborated by the Coutouriers' strenuous efforts to undo the transaction. |
| 12 | "Break points" are the reduced commissions charged by funds for larger purchases. The three purchases described above would have qualified in the aggregate for a break-point reduction of sales charges from 5.75 percent to 4.5 percent had Simpson requested the reduction. |
| 13 | Simpson claims that McCoy directed her to sell the WalMart stock and characterizes the disagreement as a "mis-communication." The law judge credited Bontrager's testimony and further found that McCoy's efforts to reverse the transaction corroborated Bontrager's testimony. |
| 14 | Simpson claimed that she quoted a price of "par and one-half" or $.50 over par. At the time, the Sheredys' existing funds had unequal balances. Simpson claimed that the Sheredys directed her to equalize the fund balances with the proceeds of the Fannie Mae securities. Accordingly, she invested different amounts of the proceeds in each fund. |
| 15 | Prudential told the Sheredys that there was nothing that could be done about their complaints because Simpson had received no commission on the transaction. |
| 16 | The annualized turnover rate is a ratio computed by dividing the aggregate amount of purchases in an account by the average monthly investment. It represents the number of times during a year that the securities in an account are replaced by new securities. Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 n.10 (1989). |
| 17 | The annualized break-even rate of return represents the rate of return on a customer's average net equity required to pay commissions and other expenses before the account begins to show a profit for the customer. Id. at 1121. |
| 18 | There was another forged LOA dated January 17, 1991, transferring $1381 from Congdon's account to another customer named "Oliver Benjamin." This unauthorized transfer predates Pattee's association with Simpson. |
| 19 | The Division's trading practices expert interviewed Watters to verify his expressed interest in speculative investing. Watters told her that he had no interest in investing in speculative securities. On the basis of that interview, the expert opined that Watters was a conservative investor, despite the notation on his account application. Simpson has not disputed the expert's opinion. |
| 20 | The record does not contain information to attribute the forged signature. |
| 21 | Pattee made unauthorized trades in the Coopers' accounts before May 1991. |
| 22 | There was another forged LOA on December 17, 1990, transferring $2,000 from the Coopers' account to another customer. This unauthorized transfer predates Pattee's association with Simpson. |
| 23 | While Simpson testified that she was unaware of the activity in the account and the complaint, Hester testified that Simpson always carefully reviewed trade tickets, confirmations, and productivity reports for her accounts. See text accompanying n.4 supra. |
| 24 | Pattee misled Mathis regarding the status and value of her account. At the opening of the account, Pattee told Mathis that she would not have to pay commissions. Periodically, Pattee assured Mathis that her monthly income checks were paid from the account's earnings; in fact, the income checks were paid out of principal. |
| 25 | The Division's handwriting expert's 1995 report to Prudential appears to attribute the signatures on the LOAs to Simpson. However, the expert was not able to review the original documents before testifying at the hearing, and did not testify regarding them. Pauline Mathis specifically disclaimed the signatures on the subject LOAs in her testimony. |
| 26 | Pauline Mathis does not have a sister. |
| 27 | Pattee misled the Trudells. When Raymond Trudell asked about his poor investment performance, Pattee characterized the losses in the account as only "paper losses" that need not concern him. |
| 28 | SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1471 (2d Cir.1996), cert. denied, 522 U.S. 812 (1997). |
| 29 | Simpson further asserts that, because she was not licensed as a supervisor, she cannot be held liable as a supervisor for Pattee's unlawful acts. Simpson, however, was not charged with failure reasonably to supervise Pattee. |
| 30 | See n.3 supra |
| 31 | Simpson's unlawful activity in the accounts she serviced herself, her disregard of serious and repeated customer complaints, failure timely to raise issues regarding Pattee's conduct despite Simpson's exacting review of account activityreports, and attempts to cover up her activities fatally undermine Simpson's claim that she was a "whistle-blower" with respect to Pattee's activities. |
| 32 | Wallace Vanstrat, Simpson's retained handwriting expert, testified that Simpson did not forge any of the signatures that he examined. The law judge found, as we find, that the Division's handwriting expert presented lengthy and detailed analysis at the hearing, and that analysis was persuasive, while Vanstrat's more conclusory opinion rejecting Simpson's possible authorship of several samples was not.
Moreover, Vanstrat did not examine, or express an opinion with respect to, several documents that the Division's expert classified as forgeries by Simpson, in particular the following: undated Command Account agreements for Watters' account and an LOA transferring $3,000 from the Trudells' account. |
| 33 | We accept a law judge's credibility finding unless substantial evidence suggests that we should not do so. See Laurie Jones Canady, Securities Exchange Act Rel. No. 41250 (April 5, 1999), 69 SEC Docket 1468, 1480, aff'd 230 F.3d 362 (D.C. Cir. 2000); Sharon M. Graham, 53 S.E.C. 1072, 1087 n.39 (1998), aff'd, 222 F.3d 994 (D.C. Cir. 2000); Jay Houston Meadows, 52 S.E.C. 778, 784 (1996), aff'd, 119 F.3d 1219 (5th Cir. 1997). |
| 34 | See e.g., PECO Energy Co. v. Boden, 64 F.3d 852, 859 (3d Cir. 1995)("A person's admission that he stole for someone else is as much against his interest as an admission that he stole for himself."). |
| 35 | Pattee's and Maul's testimony also was corroborated by the attorney Prudential ordered to investigate the customer complaints regarding the Flint branch office. He discovered numerous signed, but blank, LOA forms and customer records in Simpson's office, as Pattee and Maul had described. |
| 36 | Donald A. Roche, 53 S.E.C. 16, 24 (1997); see also Messer v. E. F. Hutton & Co., 847 F.2d 673, 678 (11th Cir. 1987); Brophy v. Redivo, 725 F.2d 1218, 1220-21 (9th Cir. 1984); SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992). |
| 37 | Roche, 53 S.E.C. at 24. |
| 38 | Cf. Neil C. Sullivan, 51 S.E.C. 974, 976 n.1 (1994) (review of NASD proceeding); Frank Custable, 51 S.E.C. 643, 650 (1993) (same). |
| 39 | In 2001, the Commission approved a National Association of Securities Dealers, Inc. ("NASD") rule that requires member firms to deliver to their non-institutional customers, prior to or at the opening of a margin account, a disclosure statement discussing the operation of margin accounts and the risks associated with trading on margin. The NASD proposed this rule in response to the growth in the level of customer margin account balances and the increase in customer inquiries and complaints to both the Commission and the NASD. Exchange Act Rel. No. 44223 (Apr. 26, 2001), 74 SEC Docket 2203. |
| 40 | J. Stephen Stout, Securities Exchange Act Rel. No. 43410 (Oct. 4, 2000), 73 SEC Docket 1441, 1460. |
| 41 | Id. at 1461 (Balasko and Hergensreder accounts). |
| 42 | The only possible exception is Donald Watters, who listed "speculation" as one of his investment objectives. We conclude that Watters sought conservative investments. See n.19 supra. |
| 43 | In addition, certain individual securities purchased for the customers were unsuitable for their investment objectives. In the case of Audrey Kindell, an extremely conservative investor for whom the purchase of any kind of risky security was unsuitable, the purchase of two speculative stocks was unsuitable. Similarly, the purchase of a mutual fund with a substantial sales charge (as opposed to a more liquid money market fund) was not suitable for Cardinal who had a foreseeable near-term need for cash. See Stout, 73 SEC Docket at 1461. |
| 44 | See Costello v. Oppenheimer, 711 F.2d 1361, 1369 (7th Cir. 1983); Miley v. Oppenheimer & Co., 637 F.2d 318, 333 (5th Cir. 1981). |
| 45 | See Joseph J. Barbato, 53 S.E.C. 1259, 1277 (1999). As we noted in Barbato, we have found excessive trading based on turnover ratios of less than 4. See also, Donald A. Roche, 53 S.E.C. at 21 (turnover ratio of 3.3); Samuel B. Franklin & Co., 42 S.E.C. 325, 328 (1964)(turnover ratio of 3.5). Although some of the turnover ratios in this case are rather low, the extremely conservative investment objectives of some of these customers, and their anxiety about equity ownership and equity trading support the finding that even these relatively low levels of trading are excessive.
Simpson asserts that the Division used an inappropriately abbreviated sample of transactions (the periods analyzed ranged from a low of six months to a high of 47 months) in the customer accounts to evaluate possible excessive trading and churning. Simpson argues that these periods result in artificially high values for the annualized turnover rate and the annualized break-even rate of return. However, we have held that the customary period to use to determine whether an account has been excessively traded is the period during which the allegedly excessive trading occurred. Canady, 69 SEC Docket at 1476-77. That the broker whose activity is subject to review managed to obey the securities laws at one time does not insulate her from liability. See id. at 1476 n.10. |
| 46 | See Stout, 73 SEC Docket at 1459; Timoleon Nicolaou, 51 S.E.C. 1215 (1994). |
| 47 | Olson v. E.F. Hutton & Co., 957 F.2d 622, 628 (8th Cir. 1992) (quoting Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1416 (11th Cir. 1983)). See also Miley, 637 F.2d at 324; McNeal v. Paine Webber, Jackson & Curtis, Inc., 598 F.2d 888, 890 n.1 (5th Cir. 1979) |
| 48 | Rizek v. SEC, 215 F.3d 157, 162 (1st Cir. 2000), Hotmar v. Lowell H. Listrom & Co., Inc., 808 F.2d 1384, 1385 (10th Cir. 1987), Shad v. Dean Witter, Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986), Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir. 1980). |
| 49 | Donald A. Roche, 53 S.E.C. 16, 22 (1997) (scienter element separates churning, an antifraud violation, from excessive trading.) |
| 50 | In its brief, the Division requested that we find that Simpson exercised de facto control over some or all of the 13 accounts where the law judge found a lack of control. This issue was not raised in the Petition for Review and is not before us. Rule 411(d), 17 C.F.R. § 201.411(d). |
| 51 | See discussion in section III.D, supra. Although Simpson controlled the trading in the Milton and Bonnie Bain accounts, we do not find, under the facts here, that trading in those accounts was excessive under either the annualized turnover ratio (1.66) or the annualized break-even rate-of-return analysis (8.3%). The break-even rate falls significantly short of the lowest levels we have found to constitute excessive trading, and is coupled with a relatively low turnover ratio. |
| 52 | See n.51, supra. |
| 53 | See DWS Securities Corp., 51 S.E.C. 814, 820 n.24 (1993); SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982). |
| 54 | Steadman v. SEC, 450 U.S. 91, 102-03 (1980). |
| 55 | Simpson also objects to the law judge's post-hearing decision to exclude Simpson's proposed counter-findings of fact and conclusions of law. The Division moved to exclude Simpson's pleading because it did not provide appropriate record citations for each proposed finding of fact as required by Commission Rule 340(b). Rule 340(b), 17 C.F.R. § 201.340(b). Rule 180(b) permits the law judge to exclude material that does not conform to the rules. Rule 180(b), 17 C.F.R. § 201.180(b). The law judge noted that the citations that Simpson provided merely identified the witness in whose testimony the alleged fact could be found, requiring a search of the entire testimony to verify the claim that the record supported the proposed finding. We have conducted an independent review of the entire record, including the proposed findings of fact which the law judge excluded. Accordingly, we conclude that Simpson is not harmed by the law judge's ruling. |
| 56 | Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 185 (1973). |
| 57 | 15 U.S.C. § 78o(b)(6)(A)(i). See also, Exchange Act § 19(h)(3)(B), 15 U.S.C. § 78s(h)(3)(B) (authorizing the Commission to suspend or bar a respondent from association with a member of an exchange or a registered securities association). In evaluating whether sanctions under Exchange Act Section 15(b)(6) are in the public interest we look for guidance to the factors the United States Court of Appeals for the Fifth Circuit identified in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). These factors are: the egregiousness of the respondent's actions; the isolated or recurrent nature of the violation; the degree of scienter involved; the sincerity of the respondent's assurances against future violations; respondent's recognition of the wrongful nature of its conduct; and, the likelihood that respondent will have opportunities for future violations. |
| 58 | 15 U.S.C. § 78u-2. To determine whether civil penalties are in the public interest, we examine whether the illegal activities involved, among other acts, deliberate or reckless disregard of a regulatory requirement; the harm caused to another person; the extent to which any person was unjustly enriched; the respondent's prior disciplinary history; deterrence; and other matters as justice may require. 15 U.S.C. § 78u-2(c). |
| 59 | 15 U.S.C. § 78u-3(a). |
| 60 | Although the Bain accounts were not churned, see n. 51, supra, we find that they were subject to unauthorized trading. |
| 61 | Responding to our April 23, 2002 order requesting additional briefing regarding the award of disgorgement for non-churning violations, the Division requested that we award additional disgorgement for violations that occurred outside the period the law judge used to craft his award. This issue was not litigated below. The lack of specificity in the record and in the Division's filing does not allow us to identify particular transactions for which the additional disgorgement would be awarded. Accordingly, we decline the Division's suggestion. |
| 62 | We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed herein. |
| * | Sandra Simpson and Daphne Pattee, Initial Decision Rel. No. 148 (Sept. 21, 1999). |
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Modified: 05/15/2002