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UNITED STATES OF AMERICA
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In the Matter of DAVID LERNER ASSOCIATES, INC. Respondent. |
: : : : : : : : : : |
ORDER INSTITUTING ADMINISTRATIVE |
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against David Lerner Associates, Inc. ("Lerner" or "Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
1. Lerner, a New York corporation with its principal place of business in Syossett, New York, is a broker-dealer that has been registered with the Commission since 1976.
Other Relevant Persons2. Lawrence Merl, age 61, a resident of Rye Brook, New York, has been a registered representative with Lerner since December 1993.
3. Michael Sean O'Connell, age 51, a resident of Basking Ridge, New Jersey, has been a registered representative with Lerner since January 1993.
4. From December 1996 through August 1999, Respondent was responsible for supervising its registered representative, Lawrence Merl ("Merl"). On a number of occasions during the aforesaid period, Merl recommended, offered and caused to be purchased on margin for three customer accounts illiquid Lerner-underwritten REIT securities that were unsuitable for the customers, given the customers' investment objectives and financial situation, including their need for liquidity.
5. From July 1998 through January 1999, Respondent was responsible for supervising its registered representative, Michael Sean O'Connell ("O'Connell"). On two occasions during the aforesaid period, O'Connell recommended, offered and caused to be purchased for a customer's IRA account illiquid Lerner-underwritten REIT securities that were unsuitable for the customer, given the customer's investment objectives and financial situation, including the concentration of the customer's limited savings in one illiquid REIT issue.
6. Merl's recommendation and offer of securities that were unsuitable for his customers violated Section 17(a) of the Securities Act of 1933 ("Securities Act"). Merl's investment recommendations that his customers purchase illiquid REIT securities on margin collateralized by the customers' bond holdings were contrary to the objectives of his customers who desired highly-liquid bond or tax-free bond issues. The margin purchases of illiquid REIT securities using the customers' liquid bonds as collateral effectively rendered the customers' holdings illiquid. The customers could not obtain cash by selling the REIT securities, which were illiquid, or by selling bonds, which collateralized the REIT securities.
7. The three customers of Merl sustained losses arising from the illiquid REIT securities that Merl purchased for their accounts, as follows: (1) an 86-year old customer lost $103,281; (2) a 75-year old customer lost $37,778; and (3) a 55-year old customer lost $34,420.
8. O'Connell's recommendation and offer of securities that were unsuitable for his customer violated Section 17(a) of the Securities Act. O'Connell's investment recommendations were contrary to the objectives of his customer, a married, middle-aged man with two children residing in his home. The customer wanted a diversified investment for the approximately $30,000 in his IRA account. This IRA account constituted nearly all of the customer's savings and was the customer's financial safety net. O'Connell concentrated the customer's IRA account in an illiquid REIT security and did not provide the diversification that the customer desired.
9. O'Connell's customer sustained a loss of $6,518 arising from the illiquid REIT securities O'Connell purchased for his IRA account.
10. Respondent failed reasonably to supervise the registered representatives who were subject to its supervision. Specifically, Respondent did not have a system of supervision reasonably designed to prevent and detect the suitability violations by the registered representatives. Respondent also had no system of follow-up and review if red flags were detected.
In particular, Respondent failed to develop a system to implement procedures to detect and prevent suitability violations. In addition, Respondent failed to develop a system to follow up on red flags, such as complaints of unauthorized transactions and mismatches between recommendations for illiquid REIT investments and customers seeking conservative, tax-exempt municipal bond issues. Such systems, if implemented, could have detected or prevented the registered representatives' suitability violations. Accordingly, Respondent failed reasonably to supervise Merl and O'Connell, registered representatives subject to its supervision, with a view to detecting and preventing their violations of Section 17(a) of the Securities Act, within the meaning of Section 15(b)(4)(E) of the Exchange Act.
11. Lerner's records with respect to accounts and transactions pertaining to the aforementioned customers contained a customer signature on a margin account form that was not authentic. Accordingly, Respondent violated Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder by failing to make and keep current, accurate books and records.
12. In lieu of disgorgement, Respondent has deposited in escrow the amount of $181,997 for distribution by the escrow agent, as set forth below, within 5 days of service of this Order upon the escrow agent:
(a) $103,281 to Pauline Quittel;
(b) $37,778 to Samuel Berman;
(c) $34,420 to Kathleen Sullivan;
(d) $6,518 to Robert Giaconia; and
(e) the escrow agent will pay, pro-rata, to the above any accrued interest on the deposit.
Respondent shall cause the escrow agent to provide by mail addressed to Fredric D. Firestone, Assistant Director, Division of Enforcement, 450 Fifth Street, NW, Washington, DC 20549-0807, a copy of each check and a cover letter stating the date each check was cleared and paid.
Respondent David Lerner Associates, Inc. undertakes to:
1. Retain, within 60 days of the date of this Order, at Respondent's expense, an Independent Review Person ("Review Person"), acceptable to the Commission's staff, to conduct a comprehensive review of Respondent's existing procedures or systems intended to prevent Respondent's registered representatives and/or sales personnel, in connection with sales of Respondent-underwritten issues and proprietary products, from (1) making unsuitable investment recommendations to customers in light of the customers' investment objectives and financial situation; and (2) failing to make and keep current accurate books and records. Respondent shall require, at minimum, the Review Person to:
(a) review whether existing procedures or systems, including, but not limited to, procedures or systems listed in paragraph 7, below, have been implemented, maintained, and followed;
(b) recommend such other procedures and systems (or amendments to existing procedures or systems), if any, as are necessary and appropriate reasonably to prevent and detect unsuitable investment recommendations and the making and keeping of inaccurate books and records; and
(c) issue a written report ("Report") of his or her findings and recommendations within 120 days of the date of this Order.
2. Adopt and implement, within 30 days after receipt of the Report, at Respondent's expense, such procedures or systems as recommended by the Review Person as provided in paragraph 1, above; provided, however, that as to any of the Review Person's recommendations that Respondent determines is unduly burdensome, Respondent may propose an alternative procedure or system reasonably designed to accomplish the same objectives. In such event, Respondent shall seek from the Review Person (1) his or her review and approval of the alternate procedure or system, or (2) an amendment to his or her recommendation. If the Review Person approves the alternative procedure or system, or amends his or her recommendation, the Respondent shall require the Review Person, within 14 days of such decision, to issue a written report which describes such alternative procedure or system, or amended recommendation, sets forth the Review Person's reasons for his or her decision, and sets the time period within which Respondent shall adopt and implement the alternative procedure or system, or amended recommendation ("Supplemental Report"). Respondent shall abide by the decision of the Review Person.
3. Authorize the Review Person to provide copies of the Report and any Supplemental Report, within 5 days of the issuance of each report, to the Securities and Exchange Commission, Division of Enforcement, addressed to the attention of Fredric D. Firestone, Assistant Director, 450 Fifth Street, NW, Washington, DC 20549-0807.
4. Cooperate fully with the Review Person, including obtaining the cooperation of Respondent's employees, affiliates, or other persons under its control.
5. Require the Review Person to enter into an agreement, providing that (1) for the period of engagement and for a period of two years from the completion of the engagement, the Review Person shall not enter into any employment, consultant, attorney-client, auditing, or other professional relationship with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such; and (2) any firm with which the Review Person is affiliated or with which he or she is a member, and any person engaged to assist the Review Person in performance of his or her duties under this Order shall not, without prior written consent of the Commission's staff, enter into any employment, consultant, attorney-client, auditing, or other professional relationship with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents in their capacity as such for the period of the engagement and for a period of two years after the engagement.
6. Nothing herein shall prevent Respondent from adopting additional policies and procedures or systems or improving upon the policies and procedures or systems adopted pursuant to its undertakings; and
7. The Review Person's review of Respondent's existing procedures or systems shall include the review of all procedures or systems, written or otherwise, relating to sales of Respondent-underwritten issues and proprietary products, including but not limited to:
(a) training of sales and supervisory personnel;
(b) opening of margin accounts and extension of margin credit, including but not limited to training of supervisory and sales personnel;
(c) obtaining correct and complete information relating to customer investment objectives, and obtaining and authenticating customer authorizations; and
(d) customer complaints.
8. For good cause shown, and upon receipt of a timely application from the Review Person or Respondent, the Commission's staff may extend any of the procedural dates set forth above.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Lerner's Offer.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 15(b)(4) of the Exchange Act, Respondent be, and hereby is, censured.
B. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist from committing or causing any violations and any future violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder.
C. Respondent shall, with ten days of entry of this Order, pay a civil monetary penalty in the amount of $50,000 to the United States Treasury. Such payment shall be:
(A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies David Lerner Associates, Inc. as a Respondent in these proceedings, the file number HO-09189, a copy of which cover letter and money order or check shall be sent to Fredric D. Firestone, Assistant Director, Division of Enforcement, 450 5th Street, NW, Washington, DC 20549-0807.
D. Respondent shall comply with the undertakings set forth above.
By the Commission.
http://www.sec.gov/litigation/admin/33-8423.htm
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