INITIAL DECISION RELEASE NO. 134 ADMINISTRATIVE PROCEEDING FILE NO. 3-9034 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. _________________________ : In the Matter of : : ALFRED M. BAUER and : INITIAL DECISION J. STEPHEN STOUT : January 7, 1999 : _________________________: APPEARANCES: Christine M. Berry, Gregory Von Schaumburg, and Adrianne W. Burkland for the Division of Enforcement, Securities and Exchange Commission. Walter L. Baumgardner for Stephen Stout BEFORE: Carol Fox Foelak, Administrative Law Judge SUMMARY Stephen Stout was charged with violating the antifraud provisions of the securities laws while employed by PaineWebber, Inc. This Initial Decision finds that from June 1991 through August 1992 Stout engaged in fraudulent sales practices that included churning customer accounts, breakpoint violations, and short-term trading in mutual funds. In the course of this trading he also provided falsely optimistic account valuations and engaged in unauthorized and unsuitable transactions. The Decision concludes that he violated the antifraud provisions. The Decision orders Stout to cease and desist from antifraud violations, bars him from association with a broker-dealer, and orders a $300,000 penalty. I. INTRODUCTION A. Procedural Background The Securities and Exchange Commission (Commission) initiated this proceeding by an Order Instituting Proceedings (OIP) on June 28, 1996, pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 (Exchange Act).[1] On December 3, 1996, the Commission issued its Order Granting Motion to Amend Order Instituting Proceedings, adding a claim for civil money penalties pursuant to Section 21B of the Exchange Act. I held a hearing in Ann Arbor, Michigan on January 13-17 and 21-22, 1996. The Division of Enforcement (Division) presented testimony from fourteen witnesses and introduced 248 exhibits. Stout presented two witnesses and introduced eleven exhibits.[2] My findings and conclusions are based upon the record. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). Pursuant to the Administrative Procedure Act,[3] I have considered the following post hearing pleadings: the Division’s Post-Hearing Brief, filed March 31, 1997; the Respondent’s Post- Hearing Brief, filed June 2, 1997; and the Division’s Reply, filed June 12, 1997. I considered and rejected all arguments and proposed findings and conclusions that are inconsistent with this decision. B. Allegations and Arguments of the Parties The Amended OIP alleges that, from at least June 1991 through at least April 1992, Respondent violated the antifraud provisions of the securities statutes by fraudulent sales practices, including unauthorized transactions, unsuitable transactions and disseminating false account valuations. It alleges that he (1) recommended and sold certain securities, including securities purchased on margin, to customers for whom such investments were not suitable in light of their age, financial condition and conservative investment objectives; (2) prepared and delivered reports to at least one customer that materially overstated the value of the investments sold, thus inducing the customer to make subsequent purchases of securities that were at least partially based on these false valuations; and (3) made, in at least one customer’s account, unauthorized purchases of securities, including purchases on margin. In its post hearing pleadings the Division argues that the evidence shows that the Respondent engaged in fraud by the means alleged in the Amended OIP -- unauthorized and unsuitable transactions and false valuations. It also argues that the evidence shows that the Respondent churned customer accounts. The Respondent claims that much of the Division’s case is barred by the statute of limitations and that the Amended OIP and pleadings did not give him fair notice of the charges; that his former employers, the broker-dealers Prudential Bache (Prudential) and PaineWebber, Inc. (PaineWebber), are at fault in that he relied on their recommendations as to the safety of various securities and the advisability of various transactions; that all clients consented to the type of trading and individual transactions that the Division alleges were churning, unauthorized or otherwise unsuitable; and offers explanations for various individual transactions. He also claims that unavailability of various documents, such as customer holding pages, has hobbled his defense. The Division seeks a cease and desist order, a bar from association with a broker-dealer, and third tier civil penalties. The Respondent contends that the proceeding should be dismissed. C. Procedural Issues 1. Statute of Limitations The Respondent argues that his acts before June 28, 1991, cannot be considered in this proceeding because of the applicable five-year statute of limitations of 28 U.S.C. § 2462, citing Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996). To the contrary, such acts can be considered to establish a respondent’s motive, intent, or knowledge in committing violations that are within the statute of limitations. Sharon M. Graham and Stephen C. Voss, Exchange Act Release No. 40727, 1998 SEC LEXIS 2598 n.47 (Nov. 30, 1998) (citing Fed. R. Evid. 404(b) and Local Lodge No. 1424 v. NLRB, 362 U.S. 411 (1960)); Terry T. Steen, 67 SEC Docket 837, 843 (June 2, 1998) (citing H.P. Lambert Co., Inc. v. Secretary of the Treasury, 354 F.2d 819, 822 (1st Cir. 1965)). Such acts can be considered in determining what sanction is in the public interest, if violations are proven. Terry T. Steen, 67 SEC Docket at 843-44. Additionally, this case includes alleged churning, which requires a hindsight analysis of the history of a broker’s management of an account and his pattern of trading that portfolio. Donald A. Roche, 64 SEC Docket 2042, 2051 & nn. 18, 19. (June 17, 1997) (quoting Miley v. Oppenheimer & Co., 637 F.2d 318, 327 (5th Cir. 1981)). See also Nesbit v. McNeil, 896 F.2d 380, 384 (9th Cir. 1990) (quoting Miley, 637 F.2d at 327). Finally, the findings and conclusions, infra, in this Initial Decision refer to Respondent’s acts prior to June 28, 1991, only incidentally or to provide context for violations that occurred within the statutory period. 2. Specificity in Pleading At several stages in this proceeding the Respondent has argued that there was a lack of specificity in pleading and that one or more allegations should be dismissed because of this. He filed a Motion for More Definite Statement pursuant to Rule 220(d) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(d). I ordered the Division to provide him with a statement "identifying the customer or customers, accounts, and securities referred to in subparagraphs C.1, C.2, and C.3" of the original OIP. Alfred M. Bauer and J. Stephen Stout, Order on Motion for More Definite Statement, 1996 SEC LEXIS 2546 (A.L.J. Aug. 19, 1996). As stated in a subsequent Order, the Division’s October 22, 1996, Motion to Amend the OIP provided this information. Alfred M. Bauer and J. Stephen Stout, Order on Motions, 1996 SEC LEXIS 3131 (A.L.J. Oct. 25, 1996). During the hearing the Respondent raised the specificity issue again, arguing that the Division failed to comply with Rule 9 of the Federal Rules of Civil Procedure (FRCP). Specifically, the Respondent moved to dismiss the count concerning false valuations, in para. I.B.2. of the Amended OIP, on the basis that it failed to comply with Rule 9 by failing to specify what specific securities were purchased as a result of the valuations. Tr. 67-69. Rule 9(b) provides, "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The FRCP do not apply in Commission administrative proceedings, which are governed by the Commission’s Rules of Practice. Rule 100 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.100; Rule 1 of the FRCP. See also The Stuart James Co., Inc., AP No. 307164, Admin. Proc. Rulings Release. No. 322, 1989 SEC LEXIS 5115, at *8-*9 (A.L.J. May 8, 1989). The disputed paragraph indicates that the customers it identifies continued to purchase securities from Stout based in part on the valuations. Thus, all purchases following the reports containing the valuations are included, but the allegedly false valuations are not "in connection with" any specific purchase[s]. The record reflects that the Respondent understood this and had sufficient notice to address the allegations in para. I.B.2. See Tr. 1483-1578, 1582-1614, 1622- 34, 1642-46. Finally, in his Post-Hearing Brief, the Respondent argues that the allegations in the Amended OIP are insufficiently particularized as to churning. In fact, the Amended OIP does not even mention "churning;" nor does it mention any of the elements of churning, such as "excessive trading." [4] As a general matter, paras. C. and D. of the Amended OIP allege that the Respondent violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Churning is a form of securities fraud that violates those provisions. See Donald A. Roche, 64 SEC Docket at 2047-49. Specifically, para. I.B. of the Amended OIP alleges that the Respondent "engaged in numerous fraudulent sales practices" including "unsuitable purchases and sales of securities." Details concerning the alleged unsuitable transactions are contained in para. I.B.1. The term "unsuitable trading" derives from Article III, Section 2 of the NASD[5] Rules of Fair Practice, which states: in recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs. Unsuitable trading may be part of a course of fraudulent conduct that violates the antifraud provisions but is not violative taken by itself. Mauriber v. Shearson/American Express, Inc., 567 F. Supp. 1231, 1237 (S.D.N.Y. 1983); Clark v. John Lamula Investors, Inc., 583 F.2d 594, 600 (2d Cir. 1978). The Division’s argument that churning occurred is based on customers and transactions that were identified as allegedly unsuitable in para. I.B.1. of the Amended OIP. Thus the Respondent was given notice of the underlying facts, but not the legal theory on which the Division now relies. In essence, the Division now argues that Stout churned each customer’s account via a series of unsuitable transactions in securities identified in para. I.B.1. The record reflects that the Respondent introduced evidence that is relevant to defending against a charge of churning, including the elements of control, excessive trading, and scienter. On balance, I conclude that the Respondent had sufficient notice so as to present a case against a charge of churning. Cf. Rule 200(d) of the Commission’s Rules of Practice, 17 C.F.R. § 201.200(d)(2), the Comment thereto, and the cases cited therein. Accordingly, I will evaluate the evidence and make findings and conclusions concerning churning. II. FINDINGS OF FACT A. Respondent Respondent Stout, a 1963 high school graduate, attended Purdue University and the General Motors Institute. Tr. 80. He did not graduate from either institution. Tr. 80. From approximately January of 1972 to February of 1977, he held a variety of jobs, including some sales positions. Tr. 81-82. Between 1977 and 1989, Stout worked for Merrill Lynch, E.F. Hutton, and, then, Prudential Bache (Prudential). Tr. 82-84. In February 1989, Stout left Prudential and joined PaineWebber, Inc. (PaineWebber), a broker-dealer registered with the Commission. Tr. 84-85. Along with Kyle Andrews and Tom Curtis, Stout started the PaineWebber branch office in Flint, Michigan. Tr. 84-85. He was on sick leave and did no work for PaineWebber from August 1992 until he left in December 1992. Tr. 400, 612, 655. In October 1992, he and Andrews founded Partnership Arbitration, which assisted their customers and others who had purchased limited partnerships in filing claims against Prudential and PaineWebber.[6] Tr. 85-89, 1385-88, 1392-1400, 1668, 1690-94. Currently, Stout is a registered representative for World Invest, Inc. Tr. 85. He filed for Chapter 13 bankruptcy September 21, 1991. Tr. 319, 876-77, 1013-14, 1709. Stout knew that a broker has an ongoing duty to "know his customers," and ensure the suitability of his recommendations and trading activity in their accounts. Tr. 82, 92, 98-102, 177, 184. Stout has been the subject of sixty-three customer complaints; most concerned Prudential or PaineWebber limited partnerships but some included allegations such as misrepresentation, unauthorized trading, and unsuitable recommendations. Tr. 518-19, 655, 676-80, 682; Div. Ex. 259.[7] By memo dated June 4, 1991, Stout’s supervisor at PaineWebber warned him about holdings of leveraged GNMA[8] securities in several client accounts and asked him to review all accounts for consistency of the investments with client objectives; the memo also referenced client complaints concerning past investment recommendations and warned that further client complaints would result in disciplinary action. Tr. 513-14; Div. Ex. 261. Stout replied by memo dated July 2, 1991, stating that only one customer complaint arose from his employment at PaineWebber and that the rest related to direct investments at Prudential,[9] concerning which he opined that Prudential engaged in a failure of due diligence and/or fraud. Div. Ex. 262. In 1990, Stout received a disciplinary "Letter of Education" from PaineWebber concerning his representations to a customer about the liquidity and value of a limited partnership, the VMS Mortgage Investment Fund. Tr. 284-90; Div. Ex. 260. Prior to coming to PaineWebber, Stout was a leading seller nationally of limited partnerships.[10] Tr. 158-59. The limited partnerships were illiquid and speculative, and many investors did not understand that the cash distributions they received included return of capital as well as current yield. Limited partnerships paid commissions up to eight times higher than commissions for standard equity securities. Tr. 318, 583. Prior to June 28, 1991, Stout sold limited partnerships to all the accounts at issue in this proceeding, and the limited partnerships remained in the accounts thereafter. Tr. 1650; Div. Exs. 21A-23B, 29A-30, 42A-43, 47A-48, 56A and B, 84A and B, 109A and B, 124A and B, 145A and B, 199, 200, 210, 229-236; Div. Ex. 248 at 5, 12, 16, 19, 23; Div. Exs. 311-14. By July 1991, Stout knew that the illiquid, speculative, limited partnerships were questionable investments.[11] Tr. 139-41, 152, 154, 160 181-82, 212-16; Div. Exs. 262, 302, 303, 305, 306, 308. Beginning in the summer of 1991, Stout sold his customers high commission mutual funds. Div. Exs. 229-239, 248; Tr. 1240, 1244, 1248-49, 1250, 1255. The subsequent trading activity in the customer accounts was extensive. B. Respondent’s Customers During the period of June 28, 1991 through August 1992, Stout acted as the registered representative for the accounts of these investors: 1. Wayne and Patty Blevins 2. Blevins Screw Products (BSP) 3. Extreme Precision Screw Products (Extreme) 4. Borneman & Peterson (B&P) 5. Lottie Balasko 6. Diplomat Pharmacy (ceased doing business with Stout in the summer of 1991) 7. David and Kathryn Hergenreder Members of the Blevins family had five of the listed accounts: Wayne and Patty Blevins’ sons Bruce, Mark, and Roger owned BPS, Extreme, and B&P, respectively. Lottie Balasko was their aunt. The Blevins family first met Stout in 1978 and had been doing business with him for a considerable period before the events at issue in this proceeding. Following a meeting at the Fenton Hotel in approximately September 1992, the Blevins family ceased doing business with Stout. Tr. 973-74. As a result of their dealings with him they brought legal action against his former employers PaineWebber and Prudential. Tr. 750, 1013. Stout was not part of those proceedings because of his bankruptcy. Tr. 1013-14, 1709. As described below, the record shows that, on and after June 28, 1991, Stout engaged in breakpoint violations and short term trading of mutual funds in the accounts of BSP, Extreme, B&P, Lottie Balasko, and the Hergenreders. This trading activity resulted in heavy sales charges to the customers with no corresponding benefit. Turnover was especially high in Mrs. Balasko’s and the Hergenreders’ accounts. Additionally, Stout provided false account valuations to Wayne and Patty Blevins, BSP, Extreme, and Diplomat Pharmacy. He also engaged in unauthorized margin trading in the accounts of Lottie Balasko and the Hergenreders. 1. Wayne and Patty Blevins Wayne Blevins, age sixty-six, owned an industrial machine shop, Blevins Screw Products (BSP). Tr. 747. In 1985, he sold BSP to his eldest son, Bruce Blevins. Tr. 747. Wayne, however, continued to work at BSP until his retirement in 1989. Tr. 747- 48. Patty Blevins, age sixty-seven, also worked for BSP, in a variety of roles, before retiring in 1992. Tr. 804. After his introduction to the Blevins family in 1978, Stout, then at Merrill Lynch, began managing the Blevins accounts. Tr. 162, 749-50. When Stout left Merrill Lynch, they followed him to Prudential and from Prudential to PaineWebber. Tr. 806-07. Stout handled their individual, joint, and corporate accounts. Tr. 748, 751-52. Wayne Blevins has a tenth grade education and limited investment experience. Tr. 163, 167, 746, 750. Patty Blevins has a high school education, and, like her husband, was inexperienced in investment matters. Tr. 804, 163, 167. Their knowledge about investing and securities was quite limited: Patty did not know that the value of a bond can change over time. Tr. 817. Wayne had no understanding of the connection between higher risk and the possibility of higher returns; no understanding of margin; and no understanding of the "ins and outs" of limited partnerships. Tr. 788-90, 793. The Blevinses did not understand the account statements they received from PaineWebber and the other brokerage firms. Tr. 755-56, 809. The Blevinses sought conservative investments that offered security of principal and a fair rate of return. Tr. 751-52, 763, 807. When Wayne initially moved the accounts from a bank, where they had been earning 3%, to Merrill Lynch, he hoped to obtain 6% to 8%. Tr. 751-52, 787-88. He did not understand that there was any increased risk in seeking such an increased rate of return; in his words, "a risk factor was not in my thought pattern." Tr. 788. The Blevinses’ investment objectives never changed at any time during their association with Stout. Tr. 752. Stout knew the Blevinses were unsophisticated and had limited knowledge about investing; he knew their investment objectives were conservative and never changed; his testimony that suggested some change over time was hairsplitting and contrary to testimony he had given in an arbitration proceeding a few months earlier. Tr. 164-67. Stout recommended transactions in the accounts and the Blevinses relied on his recommendations. Tr. 179-80, 763-65. Almost all the transactions in the accounts were based on his recommendations; almost no recommendations were rejected. Tr. 229, 763-65, 809. The Blevinses met with Stout at least once a year. Tr. 188- 89, 773, 811. Stout knew they did not understand their account statements; he would provide them with a handwritten document on his yellow legal pad summarizing their investments. Tr. 188-92, 773-79, 812-14; Div. Exs. 150-55. For example, he provided Div. Exs. 152-55, which purport to describe their investments as of December 31, 1991, early in January 1992. Tr. 778. Div. Exs. 152 and 153 have notations in Wayne’s handwriting as to the dates limited partnerships were to "mature." Tr. 813-14. The Blevinses understood this to mean that their original investment would be returned on that date. Tr. 777, 813-14. Stout told the Blevinses in the January 1992 meeting that they were "millionaires." Tr. 775, 814, 816. Stout assured his customers, including the Blevinses, that the summarized account statements were based on "market values." Tr. 835-77, 1156-69; Div. Exs. 163-65, 167-70, 172-75, 211-21. Stout alleges he got market values for limited partnerships from Prudential's Direct Investment Group (DIG) or, occasionally, with reference to Pru-Bache Energy Income Funds and Pru-Tech, from the general partners of those Prudential limited partnerships. Tr. 202-09, 1424-25. There is no corroborating evidence to support his claim that he obtained valuations from the general partners of Pru-Bache Energy Income Funds and Pru-Tech. However, reference to these securities was omitted in evaluating the evidence concerning market values in order to view the evidence in the light most favorable to Stout. Stout’s claim that he got market values for limited partnerships from the DIG is, nonetheless, not credible. During the period relevant to this proceeding, inquiries to the DIG regarding the value of Prudential limited partnerships were answered by providing values prepared for ERISA[12] purposes. Tr. 567-68. General partners of Prudential limited partnerships also provided ERISA values to those who inquired.[13] Tr. 671-73. ERISA values were calculated once a year and reflected an investment’s year-end value for the prior calendar year.[14] Tr. 567-68. In addition to ERISA values, however, someone calling the DIG for limited partnership values could also inquire as to secondary market values. Tr. 573-75. The values derived from these two methods were the only "market values" disseminated in response to inquiries about the values of the limited partnerships. Tr. 577. The above information was provided by William O’Sullivan. Tr. 562-74. He has worked for Prudential, with the DIG, since 1986; he was an integral part of it during the time Stout claimed to have obtained values from the DIG. Tr. 562-63. Initially his duties at DIG’s Inquiry Group were to respond to inquiries about the value of direct investments; in 1988 he was promoted to supervisor of the Inquiry Group. Tr. 562-63. To the extent there is any conflict between Stout’s testimony and O'Sullivan’s concerning DIG’s providing valuations, O’Sullivan’s is accepted. O’Sullivan testified in detail concerning DIG’s regular procedures, which were within the scope of his duties at Prudential. No evidence concerning deviation from regular procedures was introduced. Stout has provided no explanation as to why valuations he provided his customers were different from the ERISA or secondary market valuations available from the DIG, except to say generally that he got all the valuations from the DIG and, on a few unspecified occasions, from a general partner. Noting only the values Stout stated he obtained from the DIG, Stout’s valuations provided to the Blevinses in January 1992 were substantially higher than ERISA and available secondary market values in, e.g., Pru-Bache Energy Growth Fund G-1, Pru- Bache Energy Growth Fund G-2, Pru Realty Acq. Fund II, and Summit Ins. Div. Exs. 238, 239, 240. His claim that he received these valuations from the DIG is rejected and he has offered no alternative source for these values. Additionally, he was aware since at least July 1991 that the limited partnerships he had sold were in fact of low value or worthless. In view of these facts, I find that the values Stout provided were false and substantially overstated, and that he intentionally provided the false, overstated values.[15] In the alternative, he was reckless in providing such optimistic values to the Blevinses. The Blevinses maintained their joint and two individual accounts at PaineWebber and continued to do business with Stout after the January 1992 meeting, purchasing PaineWebber money market funds and mutual funds.[16] Div. Exs. 29A and B, 42A and B, 47A and B. The Blevins family accounts’ continuing to do business with Stout rested in part on the false valuations he provided. After the family learned of the false valuations, they ceased doing business with him. Stout called a meeting at the Fenton Hotel in the fall of 1992[17] with the Blevins family -- Wayne and Patty and their sons Mark and Bruce -- to discuss the limited partnerships. Tr. 210-19, 782-83, 798-99, 814-15, 972-75, 1000, 1029-30; Div. Exs. 156-58. He informed them that the limited partnerships had much lower values than he had previously represented. Tr. 782-83, 972-75, 1000; compare Div. Exs. 152-55 with Div. Exs. 156-58. After the meeting the Blevins family discussed the situation and decided to contact their attorney. Tr. 782-83. Wayne and Patty Blevins made no further investments with Stout. Tr. 799, 823. Nor did the other members of the Blevins family. Tr. 973-4. Blevins family members owned three neighboring industrial machine shops, Blevins Screw Products (BSP), Extreme Precision Screw Products (Extreme), Borneman & Peterson (B&P). BSP was originally owned by Wayne Blevins. At the time of the hearing each of Wayne and Patty Blevins’ three sons owned one of the three shops. Each was the trustee and sole decision maker for his shop’s pension and profit sharing plans, but they maintained similar investments in all three to avoid friction among the employees. Tr. 219, 768, 924-25, 1019-20. 2. Blevins Screw Products In addition to individual and joint personal accounts with his wife, Wayne Blevins also opened a brokerage account for BSP pension and profit sharing plans. Tr. 748, 751-52. Wayne Blevins served as trustee for the BSP plans until his retirement in 1989. Tr. 747-48. Following his father’s retirement, Bruce Blevins became trustee and sole decision maker in the BSP plans. Tr. 749, 915-16, 923-24. Under the stewardship of Bruce Blevins, the investment objectives of BSP plans remained unchanged: preservation of capital with a decent rate of return. Tr. 918. Stout understood the objectives. Tr. 918. Conservative investment objectives are generally assumed for pension and profit-sharing plans. Div. Ex. 248 at 16. All of Bruce Blevins’ dealings concerning BSP’s investments were through Stout. Tr. 928. Prior to June 28, 1991, Stout sold limited partnerships to BSP. Tr. 180-81, 928-29; Div. Exs. 56A and B; 84A and B. Bruce Blevins, a 1973 West Point graduate, lacked knowledge and sophistication regarding investment matters and did not understand the monthly account statements. Tr. 914, 923, 1007. Stout was aware of this; his awareness is underscored by his non responsive testimony in answer to questions about Bruce Blevins’ knowledge and sophistication. Tr. 179. Stout recommended investments for BSP and, except for an instance when the account did not have sufficient cash, Bruce Blevins always followed them. He did initiate at least one transaction on his own. Tr. 179-80, 228, 921-23. He followed Stout’s recommendations because Stout was a trained broker; the Blevinses were machinists, and they relied on professionals in conducting all their business transactions. Tr. 923. As trustee of the BSP plans, Bruce Blevins also received, via BSP’s accountant Chuck Shemes, simplified account statements from Stout that purported to summarize the market value of BSP investments. Tr. 959-64, 1156-69; Div. Exs. 59-60. However, a number of the market values provided by Stout to BSP differed from the ERISA or secondary market values that were disseminated by the DIG. Specifically, the December 31, 1990, valuations provided to Shemes by Stout in October 1991 for the BSP pension and profit sharing plans substantially overstated the value of several limited partnerships as compared to the ERISA or secondary market values. Div. Exs. 241-42. The valuations were discussed at a joint meeting of BSP and Extreme employees which was attended by Bruce and Mark Blevins and Stout, among others. Tr. 961-63, 1023-24. Stout’s testimony, at Tr. 283, that he informed attendees at the 1991 meeting of problems with the limited partnerships is inconsistent with the overstated values shown in Div. Exs. 241-42. Again, relying only on those which Stout stated he obtained from the DIG, Stout’s valuations were substantially higher than ERISA and available secondary market values in, e.g., Pru-Bache Energy Growth Fund G-1, Pru-Bache Energy Growth Fund G-2, and Pru Realty Acq. Fund II. Stout’s explanation that he received these valuations from the DIG is rejected and he has offered no alternative source for these values. Additionally, he was aware since at least July 1991 that the limited partnerships he had sold were in fact of low value or worthless. In view of these facts, I find that the values he provided were false and substantially overstated and that he intentionally provided the false, overstated values. In the alternative, he was reckless in providing such optimistic values to BSP. After October 1991 BSP continued to buy and sell securities through Stout. Div. Exs. 56A and B, 84A and B. BSP’s and other Blevins family accounts’ continuing to do business with Stout rested in part on the false valuations he provided. After the Fenton Hotel meeting, at which Stout disclosed lower valuations for the limited partnerships, they ceased doing business with him. Tr. 271, 972-75, 1000. a. Frequency of Trading Luz M. Aguilar, a Certified Public Accountant (CPA) employed by the Commission calculated break even or cost to equity maintenance factors and annualized portfolio turnover rates for the accounts at issue for periods after June 28, 1991. She performed the calculations both including and excluding the illiquid limited partnership values from the accounts’ equity. Tr. 685-717; Div. Exs. 229-36. Mary E. Calhoun, who testified for the Division as an expert witness in the area of industry sales practices, including suitability, excessive trading and churning, performed similar calculations, excluding the limited partnerships.[18] Tr. 1201-08; 1210-14, 1221-24, 1228-31, 1277- 78; Div. Ex. 248. The break even or cost to equity maintenance factor and the average annualized portfolio turnover rate are tests used to measure excessive trading in an account. The turnover rate measures the number of times the account turns over in a year; the calculation is the total dollar amount of purchases during a time period divided by the average account equity and then annualized.[19] Tr. 1224. The cost to equity ratio or break even return is calculated by dividing the cost of trading, including commissions and margin interest, by the average equity and then annualizing it. Tr. 1228-1231. It is the return the account would have to earn before it returned any profit to the investor. During the six month period from November 1, 1991 to April 30, 1992, Stout effected fourteen transactions in the BSP pension plan, with total commissions of $10,875.26. Div. Exs. 230, 248. Including the limited partnerships resulted in an annual turnover of 1.81 and an annual break even return of 8.3%. Div. Ex. 230. Since the values of the limited partnerships were not higher than the values shown on the account statements and materials Ms. Aguilar used, this method views the evidence in the light most favorable to Stout. When the limited partnerships are excluded, average monthly equity was $87,637.88, thus leaving commissions as 12.41% of average equity; annual turnover was 5.4, and break even return was 24.82%; the average holding period was sixty- eight days. Div. Ex. 230; Div. Ex. 248 at 16. During the ten month period from November 1, 1991 to August 31, 1992, Stout effected twenty transactions in the profit sharing plan, with total commissions of $7,008.69. Div. Exs. 231, 248. Including limited partnerships resulted in an annual turnover of 0.68 and break even of 3.01%. Div. Ex. 231. Excluding them showed an average monthly equity of $45,986.04, thus leaving commissions as 15.24% of average equity; annual turnover was 4.13 and break even was 18.29%; the average holding period was ninety days. Div. Ex. 231; Div. Ex. 248 at 16. b. Mutual Fund Trading Buying a mutual fund with a front-end sales load, selling it a short time later and buying another fund does not make sense for anyone, since this strategy essentially forfeits the 3-6% sales charge. Tr. 1233-34. The "load" is the sales charge the investor pays on an open end mutual fund; a front-end load is paid on purchase, a rear-end load, on sale. Tr. 1233-35; Div. Ex. 248 at 9 n.9. As Ms. Calhoun put it, the sales charge is a ticket to a long term investment. Tr. 1238. Every registered representative knows short term trading in open end mutual funds with a sales charge is improper. Tr. 1237-39. If an investor wants to trade mutual funds, no-load funds should be used because there is no sales charge that is forfeited by short term trading. Tr. 1239. Further, within a fund family, if an investor wants to switch into a different type of fund, for example from a bond fund into an equities fund, it can generally be done with a small, $10 or $15, transaction fee. Tr. 1257; Div. Ex. 248 at 17 n.12. Commissions on mutual funds are high, 4-7% as compared to 2-3% for exchange listed stocks. Tr. 323, 1231-32, 1248. Mutual fund switches and short-term holding periods are found throughout the BSP accounts. In the pension plan account, Zweig Strategy Fund was purchased in November and December 1991 and sold in January 1992, despite a 5% front-end sales charge. Div. Exs. 230, 248, 279. In the profit sharing plan account, the Zweig Strategy Fund was purchased in November 1991 and sold in January 1992, despite a 5.5% front-end sales charge on the purchase. Div. Exs. 230, 248, 279. The prospectus, which Stout read, warned that the fund was not an appropriate short-term trading vehicle. Tr. 389-93; Div. Ex. 279. In the pension account, several days after the Zweig Strategy Fund was sold, it was replaced by the Kemper U.S. Government Securities Fund and Strategic Global Income Fund. Div. Exs. 230, 248. In the profit sharing account, the Zweig Strategy Fund was replaced by the Kemper U.S. Government Securities Fund. Div. Exs. 231, 248. A front-end sales charge of 4.5% was paid on the purchases of the Kemper fund despite the fact that there were government funds available within the Zweig family that could have been purchased without incurring an additional sales charge. Div. Ex. 248, n.12. The Strategic Global Income Fund, as was the case in several other accounts at issue, was purchased during its initial public offering, causing the BSP to pay enhanced commissions of 6.5%.[20] Div. Ex. 248. In the pension account, the Strategic Global Income Fund was only held for ninety days. Div. Ex. 230. In both accounts, the Kemper funds were held for only 183 days. Div. Exs. 230, 231. Additionally, on February 28, 1992, Stout purchased over 800 shares of Van Kampen Merritt Intermediate High Income Fund, a closed-end fund, for both accounts. Div. Exs. 230, 231. The shares were sold April 30, 1992, only sixty-two days later. Div. Exs. 230, 231. In the Pension Plan, Stout immediately replaced the Van Kampen Merritt fund with American Southwest Mortgage real estate investment trust (REIT), which, in turn, was held for only twenty-nine days. 3. Extreme Precision Screw Products Extreme is the second of three small industrial machine shops owned by the Blevins family. Mark Blevins, Wayne and Patty’s second son, bought Extreme in 1976, and was trustee and sole decision maker for the Extreme pension and profit sharing plans. Tr. 1014, 1019. Mark Blevins graduated from high school and finished three semesters of junior college, but had limited investment experience. Tr. 1012. Stout knew he lacked knowledge and sophistication; Stout’s evasive testimony in answer to questions about this underscores his knowledge of Mark Blevins’ lack of sophistication. Tr. 221-22. Additionally, Mark Blevins, like his older brother Bruce, had trouble understanding Extreme’s monthly account statements, and Stout was aware of this. Tr. 1046. Stout made recommendations to Mark Blevins and he followed them. Tr. 226-27. Mark Blevins considered Stout highly qualified in financial investment advice and also socialized with him. Tr. 1018. The investment objectives of the Extreme plans, like those of all the Blevins Companies’ plans, called for safe, long term growth and preservation of principal. Tr. 1016, 1024. Although Mark Blevins was willing to engage in speculative activity in his personal account, he was unwilling to do so with the plan accounts, and Stout was aware of this. Tr. 1017. Prior to June 28, 1991, Stout sold limited partnerships to Extreme, and they remained in the account thereafter. Div. Exs. 109A and B; Div. Exs. 232-33. At times the liquid assets of the Extreme accounts were also heavily concentrated in speculative securities; at the end of September 1991 100% of the liquid assets in the pension fund account were invested in the PaineWebber High Income Fund, a junk bond fund; at the end of November 1991, 77% of the account’s liquid assets were concentrated in the Zweig Strategy Fund. Div. Ex. 230, Div. Ex. 248 at 20. As with BSP, Stout provided falsely optimistic values for limited partnerships that were included in an account statement discussed at the joint BSP-Extreme meeting in October 1991. Tr. 1023-24; Div. Exs. 112, 127. a. Frequency of Trading During the thirteen month period from August 1, 1991 to August 31, 1992, Stout effected twenty-five transactions in the profit sharing plan, with total commissions of $14,017.62. Div. Exs. 233, 248. Including the limited partnerships resulted in an annual turnover of 0.98 and break even of 3.96%. Div. Ex. 233. When the limited partnerships are excluded, average monthly equity was $67,585.48, thus leaving commissions as 20.74% of average equity; annualized turnover rate was 4.71, and break even return was 19.15%. Div. Exs. 233, 248. The average holding period seventy-seven days. Div. Ex. 248. During the thirteen month period from August 1, 1991 to August 31, 1992, Stout effected thirty transactions in the pension plan, with total commissions of $11,890.74. Div. Exs. 232, 248. Including the limited partnerships resulted in annualized turnover of 1.33 and break even return of 5.48%. Div. Ex. 232. When limited partnerships are excluded, average monthly equity was $66,769.18, thus leaving commissions as 17.81% of average equity. Div. Exs. 232, 248. The annualized turnover rate was 3.98, and break even return was 16.44%. Div. Exs. 232, 248. The average holding period was ninety-three days. Div. Ex. 248. b. Mutual Fund Trading A breakpoint is a price level on a mutual fund at which the sales charge paid by the investor decreases.[21] Tr. 1252-53. It is an improper sales practice, well known to every registered representative, to cause the customer to pay a higher sales charge (and the broker to receive a higher commission) by arranging purchases that avoid the breakpoint. Tr. 1252-53. A right of accumulation is readily available in a family of funds by which an investor can aggregate his purchases of more than one fund to get the benefit of the breakpoint. Tr. 1253-54. A letter of intent allows an investor to qualify for a lower breakpoint sales charge by notifying the fund family of his intent of further investment by the end of the year up to the breakpoint, and then making the purchases. Tr. 1254. In both accounts, after only eighty days, Stout sold Extreme’s interest in the PaineWebber High Income Fund, an open- ended fund for which a 4% front-end sales charge had been paid. Div. Exs. 232, 233, 248. Within a month, the profit sharing and pension accounts replaced the PaineWebber High Income Fund with the Zweig Strategy Fund. Div. Exs. 232, 233, 248. The profit sharing account was charged 5% on a $60,009 purchase; the pension account was charged 5.5% on a $36,908 purchase. In late December 1991, both accounts made smaller purchases of the Zweig fund. Div. Exs. 232, 233, 248. From October through December 1991, the combined purchases in the Zweig Strategy Fund amounted to $106,775. Div. Ex. 248. The Zweig prospectus indicates that purchases in excess of $100,000 qualify for a reduced sales charge of 4.5%. Div. Exs. 248, 279. All of Stout’s purchases of Zweig would have qualified for the 4.5% sales charge had a letter of intent been filed by Stout under a right of accumulation. Div. Exs. 248, 279.[22] In the Profit Sharing account, the Zweig fund was sold in two transactions after being held for a maximum of 58 days, and in the pension account the Zweig fund was sold after fifty-two days. Div. Exs. 232, 233. In the pension account, the PaineWebber High Income Fund was replaced by the PaineWebber Equity Trust Special Series 6, for which a 4.75% sales charge was paid. Div. Exs. 232, 275. However, rather than switching into the PaineWebber Equity Trust Special Series, for which no exchange privileges existed, Stout could have switched the pension account into another PaineWebber open-end equity fund and paid no sales charge. Div. Ex. 248. Finally, similar to the trading in the BSP accounts, within days of its sale, the pension and profit sharing accounts replaced the Zweig fund with the Kemper U.S. Governmental Securities Fund. Div. Exs. 232, 233, 248. A front-end sales charge of 4.5% was paid on the purchase of the Kemper fund despite the fact that there were government funds available within the Zweig family that could have purchased without incurring an additional sales charge. Div. Ex. 248. Additionally, there was short term trading in closed-end funds: Van Kampen Ltd. (bought December 31, 1991, sold February 4, 1992, thirty-five days later); Strategic Global (bought January 31, 1992, sold April 30, 1992, ninety days later); Van Kampen Inter. (bought January 28, 1992, sold April 30, 1992, sixty-two days later); and American Southwest Mortgage (bought April 30, 1992, sold May 29, 1992, twenty-nine days later). Div. Exs. 232, 233. Like other Blevins family accounts, Extreme ceased doing business with Stout after the Fenton Hotel meeting. Tr. 239, 973-74, 1029-30. 4. Borneman & Peterson B&P, the last of the Blevins’ family businesses, was purchased in 1983 by Roger Blevins, the youngest son of Wayne and Patty. Tr. 1054. Roger, a high school graduate, was trustee and sole decision maker for the B&P pension and profit sharing plans. Tr. 1058. Other than evidence of his educational background and occupation, Roger’s degree of sophistication and knowledge concerning investments was not addressed during his brief testimony. Tr. 1054-1070. Stout, however, considered him less sophisticated than Mark Blevins. Tr. 221. I find that Roger, like other Blevins family members, was unsophisticated and lacked knowledge concerning investing. The B&P plans had investment objectives like those of the other Blevins companies: safe, long-term growth and preservation of principal. Roger Blevins, however, was willing to take low or intermediate risks with a small portion, approximately 15%, of the plans’ assets. Tr. 1057-58. Stout recommended investments for B&P and Roger always followed them. Tr. 230-31, 1060. Stout sold limited partnerships to B&P’s accounts before June 28, 1991, and they remained in the accounts thereafter. Div. Exs. 234, 235; Div. Ex. 248 at 23. At times even the liquid portion of the accounts’ assets was concentrated in speculative, high risk securities. For example, at the end of September 1991 about 90% of the liquid assets of the pension plan were invested in the PaineWebber High Income Fund, a junk bond fund; the following month the liquid assets were concentrated in the Zweig Strategy fund. Div. Ex. 234; Div. Ex. 248 at 23. a. Frequency of Trading During the 13 month period from August 1, 1991 to August 31, 1992, Stout effected twenty-five transactions in the profit sharing plan, with total commissions of $7,288.62. Div. Exs. 235, 248. Including the limited partnerships resulted in an annual turnover of 1.38 and break even of 5.55%. Div. Ex. 235. When the limited partnerships are excluded, average monthly equity was $45,637.10, thus leaving commissions as 15.97% of average equity. Div. Exs. 235, 248. The annualized turnover rate was 3.66, and break even was 14.74%. Div. Exs. 233, 248. The average holding period was 106 days. Div. Ex. 248. During the same period Stout effected thirty-two transactions in the pension plan, with total commissions of $10,855.82. Div. Exs. 234, 248. Including the limited partnerships resulted in an annual turnover of 1.52 and a break even return of 6.04%. When the limited partnerships are excluded, average monthly equity was $65,668.68, thus leaving commissions as 16.53% of average equity. Div. Exs. 234, 248. The annualized turnover rate was 3.85, and break even was 15.26%. Div. Exs. 234, 248. The average holding period was 100 days. Div. Ex. 248. b. Mutual Fund Trading In both accounts, the PaineWebber High Income Fund, for which a 4% front-end sales charge was paid, was sold October 31, 1991, after being held a maximum of 137 days. Div. Exs. 234, 235, 248. It was replaced by the Zweig Strategy Fund, for which a 5% sales charge was paid. Div. Ex. 234, 235, 248, 279. Despite the sales charge, the Zweig fund was sold within three months. Div. Exs. 234, 235. Following the trading pattern established in the BSP and Extreme accounts, within days of its sale, the Zweig fund was replaced by the Kemper U.S. Governmental Securities Fund. Div. Exs. 234, 235, 248. A front-end sales charge of 4.5% was paid on the purchase of the Kemper fund, notwithstanding the fact that there were government funds available within the Zweig family that could have been purchased without incurring a sales charge. Div. Ex. 248. In both accounts, just over a month after the sale of the PaineWebber High Income Fund in the profit sharing account, PaineWebber Global Income Class B shares were purchased. Div. Ex. 234, 235, 248. There is deferred sales charge (rear-end load) on the sale of Class B shares. Div. Exs. 248, 276. The shares were sold approximately three months after purchase, resulting in the maximum deferred charge of 5%. Div. Exs. 234, 235, 248. However, the PaineWebber High Income Fund could have been exchanged for Class A shares of the PaineWebber Global Income Fund without charge. Div. Ex. 248. Moreover, in both accounts, several months after it had been sold, Stout repurchased shares of PaineWebber High Income Fund, incurring an additional 4% sales charge. Div. Exs. 234, 235, 248. Finally, upon sale the funds that had been invested in the PaineWebber Global Income Fund B were reinvested in Van Kampen Merritt Intermediate Fund, which, in turn, was sold within twenty-eight days to buy the High Income Advantage Trust, a closed-end income fund. Div. 234, 235, 248. The pension plan had additional short term trading in closed-end funds: Strategic Global (bought January 31, 1992, sold April 30, 1992, ninety days later); and American Southwest Mortgage (bought April 30, 1992, sold May 29, 1992, twenty-nine days later). Roger Blevins did not attend the Fenton Hotel meeting, but like other Blevins family accounts, B&P ceased doing business with Stout thereafter. Tr. 973-74, 1064. 5. Lottie Balasko Mrs. Balasko, who died in 1993, was the aunt of Patty Blevins. Tr. 527, 929. She had suffered a stroke, which left her physically impaired and essentially unable to speak, but her mental faculties were unimpaired. Tr. 528-30, 929-30, 943. She lived in her own home but required a full-time caregiver. Tr. 525-27, 931. Bruce Blevins, who lived nearby, oversaw Mrs. Balasko’s care. Tr. 930. From 1990 until Mrs. Balasko died in 1993, Ann Smith was her sole caregiver. Tr. 526-27. During this time, Ann Smith did virtually everything for Mrs. Balasko, including verbalizing and/or memorializing Mrs. Balasko’s concerns and/or desires. Tr. 527-28. Mrs. Balasko was an unsophisticated and vulnerable investor, and Stout was aware of this. Tr. 327-28. Mrs. Balasko received her account statements, checking them only to make sure they stayed consistent. Tr. 541- 42. She also received confirmations. Tr. 544-45. If Mrs. Balasko had questions, they were referred to Bruce Blevins. Tr. 543-44, 557-59, 946. Bruce, not Mark, Blevins had the primary role in watching over Mrs. Balasko’s affairs. Tr. 930-31, 943- 47, 985-89, 1028, 1051, Mrs. Balasko opened her account after a meeting in approximately August 1990 at her home at which she, Stout, Kyle Andrews, and Bruce and Mark Blevins were present.[23] Tr. 325- 27, 532, 929-938, 1028, 1346-49, 1465-68. A second meeting took place in approximately February 1991. Tr. 533-34, 940-42, 1350, 1479-80; Div. Exs. 8-12. At that meeting a list of recommendations by Stout was discussed and approved by Mrs. Balasko. Tr. 326-27, 941-42. Mark Blevins was not present at the second meeting. Tr. 1028. Mrs. Balasko’s account was in the form of a Resource Management Account (RMA). Div. Ex. 2. An RMA provided an individual the ability to write checks drawn on the brokerage account. Tr. 341, 939, 985. The RMA agreement, however, also contained a hidden clause authorizing margin trading. Div. Ex. 2. Mrs. Balasko opened her RMA because she wanted to write checks, drawn on the brokerage account, to pay monthly bills, not because she wanted to trade on margin. Tr. 341, 939, 985. Neither Mrs. Balasko nor Bruce or Mark Blevins were alerted to the margin clause, or the fact that it could be excised from the RMA form. Tr. 672-73. Stout’s initial testimony about the meetings was vague and contained many "I do not recall" responses. Tr. 325-334, 344-47. In his own direct case, after listening to the testimony of Ann Smith and Bruce and Mark Blevins he testified in detail about matters which he could not recall a few days before. Tr. 1465- 72, 1479-80. Further, at Tr. 1480, he endorsed the detailed testimony of his associate Kyle Andrews, Tr. 1346-56, 1388-89, 1403-05, about the meetings with Mrs. Balasko. (Andrews initially testified that Stout and Mark explained margin to Mrs. Balasko at the second meeting; after a break during which he spoke with Stout, Andrews testified that Mark alone explained margin. Tr. 1351-54, 1389, 1403-04.) Because of these inconsistencies, Stout’s testimony is rejected where it conflicts with other record evidence, including the testimony of Bruce and Mark Blevins concerning the meetings with Mrs. Balasko and any alleged authorization of margin trading. Mrs. Balasko had approximately $200,000 in assets and wished to supplement a modest fixed income, from Social Security and her late husband’s and her General Motors pensions, by placing her capital in risk-free investments. Tr. 929-31. In her situation it was essential to preserve the principal; thus, her account had the most conservative of objectives. Tr. 934, 1227-28, 1276-77, 1383-84; Div. Ex. 1; Div. Ex. 248 at 10. It was not intended to be a trading account. Tr. 943. Stout’s claim that aggressive trading was appropriate because her expenses exceeded her income is not logical; this situation made it essential to preserve the principal. Tr. 1276-77. Contrary to the account’s conservative investment objectives, it was concentrated in high risk securities, including the illiquid limited partnerships. At times even the liquid securities were concentrated in speculative high risk securities, for example at the end of February 1992. Div. Exs. 21A-23B; Div. Ex. 248 at 7. a. Margin Trading The account was heavily margined. Div. Ex. 229; Div. Ex. 248 at 8. A customer who trades on margin is able to buy more securities than he could if he traded strictly for cash because he is borrowing money to buy more securities. The net effect of trading on margin is to generate more trades and more commissions for the registered representative. Tr. 1231. Mrs. Balasko signed the RMA account papers that contained a clause authorizing margin trading, but she did not knowingly authorize margin trading. Nor did her nephews understand that she had authorized margin trading or in any way condone such trading in her account themselves. Tr. 945-46, 948-52, 1029. Stout never discussed the concept or consequences of margin trading in her account with Mrs. Balasko or Bruce and Mark Blevins. Tr. 938, 942, 1028. Stout’s contention that the account was "converted" to a margin trading account in February 1991 at the suggestion of Mark Blevins and with the understanding and approval of Mrs. Balasko is rejected. His claim is directly contradicted by the testimony of Mark and Bruce Blevins. Tr. 938, 942, 1028-29, 1471-80. Stout’s claim is rejected and Bruce and Mark Blevins’ testimony is accepted because of the inconsistencies described above. Stout’s memory of the alleged discussion of margin trading at the February 1991 meeting was refreshed only after Stout had heard the testimony of all other witnesses. Tr. 1471-80. b. Who Spoke for the Account? After finalizing the initial investment plan Stout did not speak directly to Mrs. Balasko about subsequent trading in her account. Tr. 327. Bruce Blevins told Stout that he would be a go-between on the account and that he would talk over any issues with her. Tr. 943-44. Stout, however, contends that Mrs. Balasko transferred trading authority in her account to Bruce or, maybe, Mark Blevins, and that the brothers had sanctioned his trading activity. Tr. 327, 352, 357-58. Stout "thinks" that the transfer of authority was documented in a power of attorney or letter of authorization but cannot recall details. Tr. 328-29, 333. No such document was offered into evidence at the hearing. Contrasted with Stout’s vague, unsubstantiated recollection, Bruce and Mark Blevins testified that at no point did Mrs. Balasko grant either of them, through power of attorney or letter of authorization, decision making authority in her account. Tr. 942, 1028. I find there was no power of attorney or letter of authorization. However, Stout’s unsubstantiated claim that Bruce and Mark had trading authority and the fact that Bruce was to act as a go-between show that Stout understood that oversight of the account was diffused, making it more unlikely that misconduct would be detected. Bruce Blevins did not actively monitor the account. Tr. 946. He learned of active trading and trading on the margin in the spring of 1992 when he was informed by accountant Charles Shemes, who was preparing Mrs. Balasko’s 1991 tax returns. Tr. 945-46. He immediately met with Stout, who reassured him that the trading was profitable. Tr. 947. Mrs. Balasko became concerned between March and August 1992 when the value of the account dropped. Tr. 546, 559. All Blevins family investment with Stout ceased after the Fenton Hotel meeting. c. Frequency of Trading During the seven month period from August 1, 1991 to February 28, 1992, Stout effected fifty-seven transactions in Mrs. Balasko’s account with commissions of $14,575.31 and margin interest charges of $6,172.25. Div. Exs. 229, 248. Including the limited partnerships resulted in annual turnover of 2.83 and break even return of 17.71%. Div. Ex. 229. When the limited partnerships are excluded, average monthly equity was $50,778.86, thus leaving commissions as 28.7% of average equity. Div. Exs. 229, 248. The annualized turnover rate was 11.20 and break even was 70.04%. Div. Exs. 229, 248. At one point the account’s monthly margin debit balance ballooned to over $320,000. Div. Ex. 229. The average holding period was thirty-three days; no securities purchase in the account were held longer than 125 days. Div. Ex. 248 at 7. d. Mutual Fund Trading On October 31, 1991, Stout purchased $49,978 -- just $22 short of the $50,000 breakpoint -- in the Zweig Strategy Fund, an open-end mutual fund. Div. Exs. 229, 279. Mrs. Balasko paid a 5.5% front-end sales charge on the purchase; the charge would have been 5% for a $50,000 purchase. Div. Ex. 248, 279. Stout knew this; he read the Zweig prospectus. Tr. 389-93. Despite the prospectus’ warning that the fund was not an appropriate short-term trading vehicle, the sales charge paid by Mrs. Balasko was forfeited when Stout sold the security after only seventy- seven days. Tr. 389-93; Div. Ex. 279. Following its sale, the Zweig Strategy Fund was replaced with the Strategic Global Income Fund, a closed-end fund that generated an enhanced commission for Stout because it was purchased on its initial public offering. Div. Ex. 229, 248. On April 7, 1992, ninety days after its purchase, the Strategic Global Fund was sold. Div. Ex. 229. On February 4, 1992, after being held 123 days, the PaineWebber High Income Fund, an open-end fund with a 4% front- end sales charge, was sold. Div. Exs. 229, 248. Shortly thereafter, on February 28, 1992, the PaineWebber Equity Trust Special Series 5 & 6 were purchased. A front-end sales charge of 4.75% was paid. Div. Exs. 229, 248. After thirty-two days, the Series 5 shares were sold, and after periods that ranged from 119 to 179 days, Stout, in a series of transactions, sold the Series 6 shares. Div. Ex. 229. The record indicates numerous further examples of short term trading of closed-end mutual funds and inappropriate switches from one fund to another. For instance, on August 30, 1991, Stout purchased 6,000 shares in the MFS Intermediate Trust, a closed-end fund. In a series of transactions beginning in late November and culminating on December 31, 1991, the shares were sold after being held for a maximum of 123 days. Div. Ex. 229. On September 27, 1991, Stout purchased 8,000 shares of the Van Kampen Merritt Intermediate Term High Income Fund, a closed-end fund. Div. Ex. 229. On October 31, 1991, thirty-four days later, Stout sold the shares. Div. Ex. 229. On December 31, 1991, after holding the shares for thirty-two days, Stout sold 4,200 shares of ACM Government Spectrum Fund, a closed-end fund. Div. Ex. 229. 6. Diplomat Pharmacy Diplomat Pharmacy is owned by the Hagerman family. Tr. 826- 27. In 1980, Dale Hagerman and his son, Phil, created the Diplomat Pharmacy Benefit Plan to prepare for Dale’s expected retirement in 1990. Tr. 826-27. Father and son were co-trustees of the Plan. Tr. 1647. In 1985, they transferred control of the Plan account from a local bank to Prudential and Stout. Tr. 829- 30. They chose Stout on the strength of his good rapport with them, favorable publicity, and a perceived excellence in handling pension plans. Tr. 829. As expected for a retirement plan, the Hagermans’ objectives were conservative. They were looking for investments that would preserve their principal, yet yield a return of approximately 10%-12%, slightly better than they were receiving from their bank. Tr. 833-34, 1648. Also, the Plan required investments that could be easily liquidated because of Dale Hagerman’s impending retirement. Tr. 832. Stout was aware of the Hagermans’ conservative investment objectives and Dale Hagerman’s planned retirement. Tr. 103-04, 832-34, 1648; Div. Ex. 207. Prior to June 28, 1991, Stout sold limited partnerships to the account. Tr. 114, 119, 1650; Div. Ex. 210. The Hagermans lacked knowledge and sophistication regarding investment matters and did not understand the monthly account statements; Stout knew this. Tr. 119, 831, 835, 879, 891, 901. They bought securities based on his recommendations. Tr. 113-14, 119-20, 837. In addition to their initial respect for his ability, they were happy with the Plan’s performance, based on the valuations he provided. Tr. 837. The Hagermans met with Stout twice a year to evaluate their account and determine what was to be purchased with their contributions. Tr. 836, 1651. Stout provided simplified account statements that summarized the account’s performance and market value. Tr. 120, 125-128, 133-41, 143, 835, 879, 891, 901; Div. Exs. 214-225. The Hagermans relied on the valuations in evaluating the status of their account and determining future purchases. Tr. 836, 901. Stout prepared a statement for the account as of June 28, 1991 and discussed it with the Hagermans. Tr. 139-52, 867-76, 890. Div. Ex. 221. Viewing the evidence in the light most favorable to Stout by omitting the value for Pru-Tech, which he claimed to have obtained directly from the general partner, Stout’s valuations are higher than ERISA and available secondary market values. Div. Exs. 221, 243. Yet he was aware at that time that the limited partnerships he had sold were in fact of low value or worthless. In view of these facts, I find that the values he provided were false and substantially overstated, and that he intentionally provided the false, overstated values. In the alternative, he was reckless in providing such optimistic values to the Hagermans. When the Hagermans compared the June 28, 1991, valuation with the February 1991 valuation they became concerned. Tr. 139- 152, 865-76, 890. They immediately ceased doing business with Stout and sued Prudential, PaineWebber and Stout. Tr. 151-52, 876-77, 892-93. The suit against Stout was dropped because of his bankruptcy; they reached a settlement with Prudential and PaineWebber. Tr. 876-77, 892-93. Stout places the date of the preparation of the June 28, 1991, valuation and of the meeting in August or September 1991. Tr. 139-40. There is no evidence in the record to show that the Hagermans made any purchases or sales of securities through Stout during the period after June 28, 1991. 7. David and Kathryn Hergenreder Married in 1986, the Hergenreders were a young couple seeking greater investment returns to keep up with inflation. Tr. 1133-34. They came to PaineWebber and Stout in 1989 after they saw an advertisement for a CD account. Tr. 505, 1072-75, 1078, 1133-34; Div. Exs. 188, 189. They were very frugal, and risk and debt adverse. Tr. 1073-74, 1077-78, 1307. An exception to their practice of never borrowing was to take out a home mortgage, which they paid off after four years. Tr. 1073. David Hergenreder is an electrical engineer with General Motors. Tr. 1132. Kathryn Hergenreder is a ninth grade math and science teacher. Tr. 1072-73. Outside of a $25,000 mutual fund purchased as a favor to a friend, the Hergenreders had no prior investment experience. Tr. 1076-77. Neither understood their monthly account statements or the concepts of limited partnerships and margin trading. Tr. 1082, 1139, 1088, 1111. The Hergenreders were primarily interested in growth that provided long-term financial safety, yet protected against inflation. Tr. 1078-79. They also planned to purchase a larger house for cash within three to five years, thus requiring liquidity, and they informed Stout of their plan. Tr. 1077-79. Stout made recommendations and they always followed them. Tr. 506-07, 1084. Prior to June 28, 1991, Stout sold limited partnerships to the account. Tr. 1621-22; Div. Exs. 199, 200. Stout never informed the Hergenreders of the risks of limited partnerships or their illiquidity. Tr. 1105-06. On August 30, 1991, he sold them an additional limited partnership, National Tax Credit Partners II. Div. Ex. 199 at Bates F 01687; Div. Ex. 200; Div. Ex. 248 at 12. By that date Stout was aware that limited partnerships were risky investments. The investment was inconsistent with their objectives. Stout also sold leveraged Ginnie Maes to the account before June 28, 1991. Div. Exs. 199, 200. Stout’s supervisor, Chris Gies, warned him to review the appropriateness of Ginnie Mae trading in the Hergenreder account in a memo dated June 4, 1991. Div. Ex. 261. Yet on June 28, 1991, Stout sold additional leveraged Ginnie Maes to the account. Div. Ex. 199 at Bates F 01699; Div. Ex. 200 at June 1991, pp. 6-8. On that date all account assets were in limited partnerships or Ginnie Maes. Div. Ex. 199 at Bates F 01695-97; Div. Ex. 200 at June 1991 pp. 1-3. The additional investment in a speculative security was inconsistent with the account’s conservative objective. All Ginnie Maes were sold in November 1991. Div. Ex. 199 at Bates F 01659-66; Div. Ex. 200 at Nov. 1991 pp. 6-9. The Hergenreders did not authorize these transactions. Tr. 1086-87, 1141-42. They authorized the first Ginnie Mae purchase in 1990, but did not authorize any other transactions in those securities. Tr. 1086. a. Margin Trading The account was heavily margined. Div. Exs. 199, 200, 236; Div. Ex. 248 at 13. The account contained a margin agreement which represents that it was signed by the Hergenreders on January 30, 1990. Div. Ex. 190. The signatures, however, are not theirs.[24] Tr. 1099-1101, 1147. Nonetheless, Stout’s computer indicated the account had been approved for "type 2" or margin trading. Tr. 1622-23. Stout never discussed margin with them before commencing margin trading. Tr. 518, 1622-23, 1093- 94, 1110-11. The conflict in the testimony on this point between the Hergenreders and Stout is resolved in favor of the Hergenreders. In view of their aversion to debt -- even a home mortgage -- it is unlikely they would have embraced margin trading. Further, when testifying in the Division’s direct case Stout testified he did not recall whether he discussed margin with the Hergenreders. Tr. 517-18. Then, after listening to the Hergenreders’ testimony, he testified in his own case in detail about instances in which he allegedly discussed margin with them. Tr. 1622-26. This later testimony thus lacks credibility. In fact the Hergenreders had never heard of margin trading until 1992. Tr. 1093-94, 1097, 1099-1100, 1110-11, 1146-47. b. Frequency of Trading During the ten month period from June 28, 1991 to March 31, 1992, Stout effected sixty-three transactions in the Hergenreders’ account with total commissions of $12,397.66 and margin interest of $9370.41. Div. Ex. 236; Div. Ex. 248 at 12- 14. Including the limited partnerships resulted in an annual turnover of approximately 3.13 and a break even return of 21.1%. Div. Ex. 236. When the limited partnerships are excluded, average monthly equity was $32,804.08, thus leaving commissions as 37.79% of average equity. Div. Exs. 236, 248. The annualized turnover rate was 11.81 and the break even was 79.63%. Div. Exs. 236, 248. The average holding period was thirty-one days. The longest holding period for a mutual fund was eighty-four days. Throughout this period, Stout traded the Hergenreders on margin. Div. Ex. 236. c. Mutual Fund Trading The Hergenreders’ account contains numerous examples of short-term trading and mutual fund switches. For example, the PaineWebber High Income Fund, an open-end fund with a 4% front- end sales charge, was sold October 31, 1991, after being held only fifty-two days. Div. Exs. 236, 248, 277. That same day, Stout replaced the PaineWebber High Income Fund with the Zweig Strategy Fund. Div. Ex. 229. Notwithstanding the front-end sales charge of 5.5%, the Zweig Strategy Fund was sold less than three months later. Div. Exs. 236, 248, 279. On November 25 and 29, 1991, the PaineWebber Equity Special Series 6 was purchased. Div. Exs. 236, 248. A front-end sales charge of 4.75% was paid. Div. Exs. 248, 275. The shares were sold after being held for thirty-two and thirty-six days, respectively. Div. Exs. 236, 248. On November 29, 1991, the PaineWebber Equity Special Series 5 was purchased. Div. Exs. 236, 248. Similar to the Special Series 6 fund, a front-end sales charge of 4.75% was paid. Div. Exs. 248, 274, 275. The Special Series 5 fund was sold after thirty-two days. Div. Exs. 236, 248. There was additional short term trading in closed-end funds. After the PaineWebber Equity Special Series Trusts were sold, the Van Kampen Merritt Intermediate Term High Income Fund and MFS Intermediate Income Trust were purchased. Div. Exs. 236, 248. On January 29, 1992, after being held twenty-nine days, the Van Kampen Merritt Fund was sold and replaced with American Southwest Mortgage, and Strategic Global Income Fund, again purchased on its public offering. Div. Exs. 236, 248. On March 20, 1992, after eighty days, the MFS trust was sold and replaced at a cost of $977 with the High Income Advantage Trust, another closed-end mutual fund. Div. Exs. 236, 248. Stout never discussed breakpoints, switching among funds in the same family, or commissions with the Hergenreders. Tr. 1091. After receiving margin calls and being advised by their tax preparer during 1992 about the amount of activity in their account and the unsuitability of limited partnerships, the Hergenreders complained to PaineWebber. Tr. 1100-18. Their complaints are summarized in their December 1, 1992, letter to Chris Gies. Div. Ex. 205. They reached a settlement with PaineWebber. Tr. 1117-18. 8. The Role of Prudential and PaineWebber in Stout’s Trading Stout testified at length concerning why he entered into numerous questionable transactions, including short term trading in Mrs. Balasko’s, BSP’s, and other accounts. Tr. 1483-1511, 1516-43. In essence, he testified that persons who identified themselves as working for a PaineWebber trading desk in New Jersey recommended the transactions. They would call him on the telephone during working hours, he testified. These individuals did not always disclose their names but he could identify them as there were only two or three; however he did not recall their names at the time of the hearing. Tr. 1496-97, 1499, 1505. This testimony is vague and otherwise unsubstantiated and difficult to believe. No weight has been attached to this testimony as explaining the questioned transactions. The Respondent suggests that customer holding pages, which are not in evidence, might have disclosed changed account objectives or instructions to engage in specific transactions in speculative securities. Tr. 1635-42. The record does not show that the Respondent attempted to subpoena holding pages from PaineWebber. Given the nature of the accounts in questions, it is unlikely that the investment objectives would have changed from conservative to speculative. The absence of the holding pages in no way detracts from the finding that all the accounts at issue had conservative objectives. Stout also testified that he had relied on the advice of Prudential and PaineWebber in selling limited partnerships before June 28, 1991. Tr. 180-81, 1416, 1648-48, 1672-73, 1688; Resp. Exs. A, H, I, J. By that date, however, he was aware that the limited partnerships he had sold were speculative and possibly worthless securities. His previous reliance on the advice of Prudential and PaineWebber is irrelevant to his actions on and after that date in the accounts at issue in this proceeding. D. Credibility Stout’s testimony in the Division’s direct case is replete with "I don’t recall" responses to questions about discussions he had with the customers, their objectives and the transactions in their accounts. Tr. passim: 80-287, 318-519, 610-82. In his direct case he testified at length about advice received from PaineWebber employees in New Jersey concerning many specific transactions, but could not recall the employees’ names. Tr. 1483-1543. On the other hand, by the time of his testimony in his direct case Stout recalled details of meetings concerning, for instance, Ms. Balasko. Tr. 1465-72. He commented, "My memory has been pretty well refreshed on any number of different things." Tr. 1467. He also recalled his dealings with the Hergenreders in detail. He stated that they never told him they were saving to buy a new house and that most of his conversations were with David Hergenreder only. He recalled specifics of various conversations, meetings in his office, and the visit when they obtained a copy of the margin agreement. Tr. 1614-1646. Additionally, Stout’s testimony concerning details of the meetings with Mrs. Balasko changed over time. It was initially inconsistent that of his associate Kyle Andrews. Further, Andrews’ testimony concerning Stout’s involvement in an alleged explanation of margin to Mrs. Balasko changed after a break during which he conferred with Stout. The inconsistency in the specificity of Stout’s recollection, depending on the situation and its relationship to his self interest, is striking. It diminishes the credibility of his testimony generally, whether testimony recalling specific details or testimony that specifics cannot be recalled. III. CONCLUSIONS OF LAW In this section it is concluded that Stout willfully violated the antifraud provisions, Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by breakpoint violations and short-term trading in mutual funds and by churning. His course of action was facilitated by his misrepresentations concerning the value of securities in the accounts of Wayne and Patty Blevins, BSP, and Extreme; based in part on these false valuations, the Blevins family accounts continued to engage in the purchase and sale of securities with Stout. He also engaged in unauthorized and unsuitable trading. A. Antifraud Provisions The OIP charged Stout with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, commonly referred to as the antifraud provisions. Section 17(a) of the Securities Act make it unlawful "in the offer or sale of" securities, by jurisdictional means, to: 1) employ any device, scheme, or artifice to defraud, 2) obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary to make the statement made not misleading, or 3) engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe similar practices "in connection with" the purchase or sale of securities. Scienter is required to establish violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; it is "a mental state embracing intent to deceive, manipulate, or defraud." Aaron v. SEC, 446 U.S. 680, 686 & n.5, 695-97 (1980); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976).[25] Recklessness can satisfy the scienter requirement under Securities Act Section 17(a)(1) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. David Disner, 63 SEC Docket 2246, 2254 & n.20 (Feb. 4, 1997); Steadman, 967 F.2d at 641-42; Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990), cert. denied, 499 U.S. 976 (1991). See also Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981); Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir. 1980). Reckless conduct is conduct which is ‘highly unreasonable’ and which represents ‘an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.’ Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir.), cert. denied, 439 U.S. 1039 (1978) (quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977)). B. Mutual Fund Trading Much of Stout’s trading during the period after June 28, 1991, involved mutual funds. His sales practices, which included short-term holding periods, mutual fund switches, breakpoint violations, and enhanced commission transactions in these high commission products, violated the antifraud provisions. Russell L. Irish, 42 S.E.C. 735, 740-42 (1965), aff’d, 367 F.2d 637 (9th Cir. 1966), cert. denied, 386 U.S. 911 (1967). Short-term trading in mutual funds, which resulted in the accounts’ forfeiting sales charges of approximately 5%, occurred in the BSP, Extreme, B&P, Balasko, and Hergenreder accounts. Breakpoint violations occurred in the Extreme and Balasko accounts. In one instance a purchase was made just $22 below the $50,000 breakpoint. The only benefit from these transactions accrued to Stout in the form of commissions. The trades involving the Zweig Strategy Fund illustrate Stout’s sales practices involving breakpoint violations, mutual fund switches and short-term holding periods. He read the Zweig Strategy Fund prospectus. He failed to take advantage of the breakpoints and rights of accumulation available to Mrs. Balasko and the Extreme pension and profit sharing plans. Stout ignored the availability of cost-free switches within families of funds, thus generating unnecessary commissions. Examples include selling the Blevins’ companies’ shares of the Zweig Strategy Fund and replacing them with the Kemper U.S. Government Securities Fund, for which an additional 4.5% front- end sales charge was paid. For no charge or a nominal fee, Stout could have exchanged the Zweig Strategy Fund shares for Zweig Government Securities, thereby avoiding additional sales charges incurred with the purchase of the Kemper fund. Additionally, by purchasing the Strategic Global Income Fund on its initial public offering for the Extreme accounts and Mrs. Balasko, Stout received an enhanced sales credit or commission that was not disclosed to his customers. All the accounts received confirmations and monthly account statements from PaineWebber. However, as Stout knew, Blevins family members and the Hergenreders did not understand the documents. When a customer lacks the skill or experience to interpret confirmations, monthly statements, or other such documents, they do not relieve a broker of liability for misconduct. Karlen v. Ray E. Friedman & Co. Commodities, 688 F.2d 1193, 1198-1200 (8th Cir. 1982); see also Hecht v. Harris, Upham & Co., 283 F. Supp. 417, 434-39 (N.D. Cal. 1968), modified on other grounds, 430 F.2d 1202 (9th Cir. 1970). C. Churning Stout’s short-term trading in high commission products also was churning. Churning ‘occurs when a securities broker enters into transactions and manages a client’s account for the purpose of generating commissions and in disregard of his customer’s interests.’ Donald A. Roche, Opinion of the Commission, 64 SEC Docket 2042, 2047-48 (June 17, 1997) (quoting Miley, 637 F.2d at 324); Mihara, 619 F. 2d at 820-21. See also McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888, 890 n.1 (5th Cir. 1979); Olson v. E.F. Hutton & Co., 957 F.2d 622, 628 (8th Cir. 1992); Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1416 (11th Cir. 1983). The three elements of churning are: (1) control of the account by the broker, either explicit (discretionary trading) or de facto (through acquiescence, trust, or reliance); (2) excessive trading in the account in light of the customer’s investment objectives; and (3) scienter on the part of the broker. Donald A. Roche, 64 SEC Docket at 2048, 2049 n.14 (citing Miley, 637 F.2d at 324; Mihara, 619 F. 2d at 821; Albert V. O’Neal, 51 S.E.C. 1128, 1130 (1994)); Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986). See also Nesbit v. McNeil, 896 F.2d 380, 383 (9th Cir. 1990). Churning in itself violates Exchange Act Section 10(b) and Rule 10b-5. Donald A. Roche, 64 SEC Docket at 2049; Mihara, 619 F. 2d at 821. See also Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498 (11th Cir. 1985); Costello v. Oppenheimer & Co., 711 F.2d 1361 (7th Cir. 1983). 1. Control De facto control of an account may be established where the customer habitually follows the advice of the broker. Donald A. Roche 64 SEC Docket at 2049 n.14 (citing Mihara, 619 F.2d at 821); Newburger, Loeb & Co. v. Goss, 563 F.2d 1057, 1069-70 (2d Cir. 1977), cert. denied, 434 U.S. 1035 (1978). A broker may have control of a customer account if the customer is unable to evaluate the broker’s recommendations and to exercise independent judgment. Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 676-77 (9th Cir. 1982) (citing Mihara, 619 F.2d at 821); Hecht, 283 F. Supp. at 433; Eugene J. Erdos, 47 S.E.C. 985, 989-90 (1983), aff’d, 742 F.2d 507 (9th Cir. 1984). Some factors to consider in determining whether or not a broker controlled an investor’s account include: the investor’s sophistication; the investor’s prior securities experience; the trust and confidence the investor has in the broker; whether the broker initiates transactions or whether the investor relies on the recommendations of the broker; the amount of independent research conducted by the investor; and the truth and accuracy of information provided by the broker. Stuart C. Goldberg, Fraudulent Broker-Dealer Practices, § 2.8[b][1] (1978). Stout controlled trading in the accounts at issue. All of Stout’s customers were unsophisticated investors with little or no securities experience. During all relevant times, Stout’s customers showed great confidence in his expertise and almost always accepted all of his recommendations. Also, they rarely, if ever, initiated transactions in their accounts, instead deferring to Stout’s recommendations. These factors are true of all the customers, but especially so of Mrs. Balasko. In short, the record clearly establishes that the total reliance Stout’s customers placed in him as well as their lack of understanding or experience in investment matters resulted in Stout’s de facto control of the accounts at issue. 2. Excessive Trading The turnover rate and cost to equity ratio or "break even" are methods used to determine excessive trading in an account. Goldberg, supra, § 2.9[b][1]; Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 1990); Nesbit, 896 F.2d at 383. Trading in the accounts at issue was analyzed for periods ranging from six to thirteen months. Trading in the Balasko and Hergenreder accounts was analyzed for periods of seven and ten months, respectively. These are sufficient periods of time to determine excessive trading. See John M. Reynolds, 50 S.E.C. 805, 806-08 (Feb. 25, 1992) (churning established after analyzing a ten month period); Ronald L. Brownlow, 47 S.E.C. 662, 666 (1981) (churning established after analyzing a seven month period). a. Turnover Rate In retail securities accounts, for a conservative investor, an annualized turnover rate of two is suggestive, of four is presumptive, and, of six or more, is conclusive of excessive trading. Expert testimony at Tr. 1225. See also Goldberg, supra § 2.9[b][1]; Arceneaux, 767 F.2d at 1502; Mihara, 619 F.2d at 821. See also Donald Arthur Winslow, A Model for Determining the Excessive Trading Element in Churning Claims, 68 N.C.L. Rev. 327, 339-40 (1990), noting the "six" rule and the "2-4-6" rule. Lower ratios do not preclude a finding of excessive trading. Nesbitt, 896 F.2d at 383. Division expert Calhoun explained that she excluded the limited partnerships from the accounts when calculating excessive trading because of their illiquidity and because their values were not known. When values for the limited partnerships are excluded, annualized turnover rates ranged from over three, to over four (in the BSP accounts and the Extreme Profit Sharing Plan account) to over 11 (in the Balasko and Hergenreder accounts). Excluding the limited partnerships in this case appeals to common sense because they were illiquid and had unknown and possibly worthless values. Additionally, during the time period at issue, after June 28, 1991, Stout knew they were illiquid and worth little, if anything. However, neither the Commission nor the courts have endorsed the approach of omitting illiquid securities in churning calculations or even addressed the issue. Therefore, viewing the evidence in the light most favorable to the Respondent, in view of the Division’s burden of proof, values for the limited partnerships (as reflected in Div. Exs. 229-36) have been included in calculating churning measurements. The Balasko and Hergenreder accounts had annual turnover rates of 2.83 and 3.13, respectively. The trading in the Balasko account after June 28, 1991, was largely short-term trading in mutual funds that made no sense for any account, let alone one with extremely conservative investment objectives. Trading in the Hergenreder account on and after June 28, 1991, was short- term trading in mutual funds and trading in speculative, leveraged Ginnie Maes that was inconsistent with conservative account objectives. The longest holding period for a mutual fund was 84 days. Additionally, there were annual turnover rates of 1.81 in the BSP pension plan, 1.52 in the Extreme pension plan, and 1.38 and 1.52 in the B&P profit sharing and pension plans, respectively -- also accomplished with short-term trading in mutual funds. All these accounts had conservative investment objectives. All were excessively traded. See Samuel B. Franklin & Co., 42 S.E.C. 325, 327-28 (1964) (annualized turnover rates of 1.68 [3.5 in 25 months] and 2.93 [4.4 in 18 months] were excessive); J. Logan & Co., 41 S.E.C. 88, 93-97, 99 (1962), aff’d sub nom. Hersh v. SEC, 325 F.2d 147 (9th Cir. 1963) (annualized turnover rates of 1.58 to 2.08 were excessive); First Securities Corp., 40 S.E.C. 589, 590 (1961) (annualized turnover rate of 1.7 was excessive); R.H. Johnson & Co., 36 S.E.C. 467, 472, 479-80, 485 (1955), aff’d sub nom. R. H. Johnson & Co. v. SEC, 231 F.2d 523 (D.C. Cir. 1956). b. Cost to Equity Ratio A further test of excessive trading examines the net amount of money invested and the transaction costs incurred. Referred to as the "break even" or "cost to equity ratio," this method determines the percentage of return on the customer’s average net equity needed to pay broker-dealer commissions and other expenses before the account breaks even and returns the first dollar of income or appreciation to the investor. See Goldberg, supra, § 2.9[b][5]. Trading practices that require an account to appreciate in excess of 20% just to break even have been held to constitute excessive trading. Peter C. Bucchieri, 61 SEC Docket 2771, 2777 (May 14, 1996) (finding excessive trading with break even cost factors of 21% to 30%); Michael David Sweeney, 50 S.E.C. 761, 765 (1991) (finding excessive trading with break even cost factors of 19% to 31%); see also Goldberg, supra, § 2.9[b][1] (break even cost factors of 16% are presumptive of excess trading). Again, including the limited partnerships so as to view the evidence in the light most favorable to the Respondent, Mrs. Balasko had an annualized break even cost factor of 17.71%, and the Hergenreders, 21%.[26] This bolsters the conclusion that these accounts were excessively traded. D. Scienter The record shows the Respondent’s scienter: his intent was to deceive and defraud. Stout directly benefited from the breakpoint violations, short-term trading in mutual funds, and churning. He understood the costs of a short-term trading strategy, which increased commissions, and knew his recommendations were unsuitable and contrary to his customers’ investment objectives. Additional practices by Stout -- false valuations and unauthorized and unsuitable trading -- that do not in themselves violate the antifraud provisions lend support to the conclusion that he acted with scienter. 1. False Valuations Stout provided false valuations concerning limited partnerships in the accounts of Diplomat Pharmacy (in September 1991), BSP and Extreme (in October 1991), and Wayne and Patty Blevins (in January 1992). Diplomat Pharmacy immediately ceased doing business with Stout on receipt of the false valuations. However, Wayne and Patty Blevins, BSP, and Extreme, as well as the other Blevins family accounts, B&P and Lottie Balasko, continued to purchase and sell securities through Stout based in part on the falsely optimistic picture he presented of the assets in their accounts. Stout knew the valuations he provided materially overstated the values of the limited partnerships. This is shown by his July 2, 1991, memo responding to his supervisor’s warning (Div. Exs. 261, 262), and the lawsuits filed against him prior to that date that concerned his sales of limited partnerships. Additionally, the false valuations in Blevins family accounts were provided after his meeting with Diplomat Pharmacy, in which the Hagermans questioned the drop in valuations of certain of their limited partnerships and following which they ceased doing business with him. In the alternative, he was reckless in not knowing the valuations materially overstated the worth of the limited partnerships. 2. Unauthorized Trading Margin trading increases the amount of securities purchased, thus increasing commissions. Stout engaged in unauthorized margin trading in the accounts of Mrs. Balasko and the Hergenreders. Mrs. Balasko opened an RMA because she wanted to write checks on the account. The paper she signed contained a clause authorizing margin trading, but she did not knowingly authorize margin trading. Neither Stout nor anyone else discussed it with her, and there is not the slightest suggestion in the record that she understood margin trading. Neither Bruce nor Mark Blevins could, or did, authorize margin trading on her behalf. Accordingly, the margin trading in Mrs. Balasko’s account was unauthorized. Karlen, 688 F.2d at 1198-1200; see also Hecht, 283 F. Supp. at 434-39. The Hergenreders’ account was heavily margined, but they did not authorize it, knowingly or unknowingly. Stout never discussed margin trading with them before commencing it. The margin trading in the Hergenreders’ account was also unauthorized. 3. Unsuitable trading In addition to the mutual fund trading practices and churning, there was additional unsuitable trading. Margin trading, which increases risk, was unsuitable for the liquid portion of the accounts of Mrs. Balasko and the Hergenreders because of their conservative objectives and because the remainder of the accounts was occupied by illiquid limited partnerships. Although Stout argues that he relied on representations of his employers Prudential and PaineWebber that the limited partnerships were conservative investments when he sold them to customers, during the time at issue in this proceeding, he knew them to be illiquid and of questionable value. Therefore he knew margin trading and speculative investments in the accounts were unsuitable. During the time at issue he actually sold an additional limited partnership to the Hergenreders. Additionally, at times the liquid portions of Mrs. Balasko’s, Extreme’s, and B&P’s accounts were concentrated in speculative, high risk securities. In conclusion, the Respondent acted with scienter; his intent was to deceive and defraud. The commissions that resulted from his actions provide a motive. His lulling Blevins family members with misleading valuations of limited partnerships enabled him to continue his trading activities in their accounts until September 1992. His undertaking margin trading in accounts with conservative objectives without discussing it with the investors also shows an intent to deceive them. E. Willfulness The Division requests sanctions pursuant to Sections 8A of the Securities Act and 15(b)(6), 21B, and 21C of the Exchange Act. The Commission must find willful violations to impose sanctions under Sections 15(b)(6) and 21B of the Exchange Act. It is well settled that a finding of willfulness does not require an intent to violate, but merely an intent to do the act which constitutes a violation. Steadman v. SEC, 603 F.2d 1126, 1135 (5th Cir. 1979), aff’d on other grounds, 450 U.S. 91 (1981); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976), cert. denied, 434 U.S. 1009 (1978); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). The acts which constituted the Respondent’s violations were, as described above, clearly intentional. His violations of the antifraud provisions were thus willful. IV. SANCTIONS The Division requests a cease and desist order; a bar from association with a broker-dealer; and a third tier civil money penalty. The Respondent urges that this proceeding be dismissed and does not address possible sanctions. For the reasons discussed below, these sanctions will be ordered: a bar from association with any broker or dealer, a cease and desist order, and $300,000 in third tier civil penalties. A. Sanction Considerations When the Commission determines administrative sanctions, it considers: 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 the defendant’s occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d at 1140 (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978), aff’d on other grounds, 450 U.S. 91 (1981)). The Commission determines sanctions pursuant to a public interest standard.[27] Thus, in addition to issues related to the violator, it "weigh[s] the effect of [its] action or inaction on the welfare of investors as a class and on standards of conduct in the securities business generally." Arthur Lipper Corp., 46 S.E.C. at 100; Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976). The amount of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). B. Sanctions 1. Cease and Desist Sections 8A of the Securities Act and 21C of the Exchange Act authorize the Commission to issue a cease and desist order against a person who "is violating, has violated, or is about to violate" any provision of the Acts or rules thereunder. As concluded above, Respondent Stout willfully violated Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. Further, the record shows a reasonable likelihood of such violations in the future.[28] The relevant factors to consider when assessing the likelihood of recurrent violation include ‘whether a defendant’s violation was isolated or part of a pattern, whether the violation was flagrant and deliberate or merely technical in nature, and whether the defendant’s business will present opportunities to violate the law in the future.’ SEC v. Steadman, 967 F. 2d 636, 648 (D.C. Cir. 1992) (quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1228 (D.C. Cir. 1989)). Stout’s violative actions involved several customers and continued for over a year. Thus his violations were not isolated but were part of a pattern. The violations were "flagrant and deliberate" and not "merely technical." He is still working in the securities industry, so his business will present opportunities to violate the law in the future. A lack of recognition of the wrongful nature of his conduct adds to the likelihood of future violation. Accordingly, it is appropriate to order him to cease and desist from committing or causing and violations or future violations of Securities Act Section 17(a) and Exchange Act 10(b) and Rule 10b-5 thereunder. 2. Bar In its Post-Hearing Brief the Division requests, pursuant to Section 15(b) of the Exchange Act, that the Respondent be barred from association with a broker-dealer. Based on the factors discussed in Steadman v. SEC, 603 F.2d at 1140, it is in the public interest to bar Stout from association with a broker or dealer. His activities were egregious, involving several fraudulent practices whose only purpose was to maximize commissions and avoid detection by the customers. He engaged in churning, breakpoint violations, and short-term trading in mutual funds. He facilitated his course of action with misrepresentations concerning the value of accounts and unauthorized and unsuitable margin trading. The violative activity was recurring in that it continued for over a year. A high degree of scienter is indicated by his lengthy experience in the securities business and the relationship with the customers that he cultivated over a period of many years. During the period at issue in this proceeding, his violations, misrepresentations, and unauthorized and unsuitable trading, "exhibited an obvious disregard for the well-being of his customers, in contravention of his duty as a securities professional." Martin Herer Engelman, 59 S.E.C. Docket 1038, 1057 (May 18, 1995), aff’d, 87 F.3d 1319 (9th Cir. 1996). Further, Stout has not acknowledged the wrongfulness of his conduct and has given no assurances against future violations. He gave misleading and conflicting explanations as to his dealings with the customers and transactions at issue in this proceeding. He blamed Prudential and PaineWebber even as to allegations that had nothing to do with his selling limited partnerships. For example, he sought to blame his short-term trading of mutual funds on advice purportedly received by otherwise unidentified phone calls from PaineWebber headquarters. Thus, his participation in the securities industry puts unwary investors at financial risk. 3. Civil Money Penalty Section 21B(a) of the Exchange Act authorizes the Commission to impose civil money penalties for willful violations of the Securities or Exchange Acts or rules thereunder. In considering whether a penalty is in the public interest, the Commission may consider six factors: (1) fraud, (2) harm to others, (3) unjust enrichment, (4) previous violations, (5) deterrence, and (6) such other matters as justice may require. Section 21B(c). New Allied Development Corp., 63 SEC Docket 807, 821 n.33 (Nov. 26, 1996); First Securities Transfer System, Inc., 60 SEC Docket 441, 446-48 (Sept. 1, 1995). See also Jay Houston Meadows, 61 SEC Docket 2444, 2456-58 (May 1, 1996), aff’d, 119 F.3d 1219 (5th Cir. 1997); Consolidated Investment Services, 61 SEC Docket 20, 32-34 (Jan. 5, 1996). As concluded above, Stout willfully violated the antifraud provisions -- Securities Act Section 17(a) and Exchange Act 10(b) and Rule 10b-5 thereunder. His violative actions "involved fraud, deceit . . . or deliberate or reckless disregard of a regulatory requirement" within the meaning of Exchange Act Section 21B(c)(1). The customers suffered financial harm. He was unjustly enriched through increased commissions resulting from his violative activity. Any restitution that the customers received did not come from him; due to his bankruptcy, the customers did not file suit against him. Concerning previous violations, in 1990 Stout received a disciplinary "Letter of Education" from PaineWebber concerning his representations to a customer concerning liquidity and value of a limited partnership. A penalty is in the public interest in this case. A penalty in addition to a cease and desist order and a bar is necessary for the purpose of deterrence. See Exchange Act Section 21B(c)(5); H. Rep. 101-616 (1990). A third tier penalty is appropriate because the violative acts involved deceit and resulted in pecuniary gain to Stout. See Section 21B(b)(3). The maximum third tier penalty for a natural person for "each act or omission" is $100,000 for the violations in this proceeding.[29] Exchange Act Section 21B, like most civil penalty statutes, leaves the precise unit of violation undefined. See Colin S. Diver, The Assessment and Mitigation of Civil Money Penalties by Federal Administrative Agencies, 79 Colum. L. Rev. 1435, 1440-41 (1979). In the instant case the unit could be each violative transaction, which would result in an astronomical maximum penalty. Alternatively, Stout’s entire course of action could be considered as one violation, which would result in a maximum penalty of $100,000. I conclude that his dealings with each of three groups of customers - Lottie Balasko; the Blevins family companies; and the Hergenreders - constitute separate courses of action. Accordingly, a third tier penalty of $300,000 is appropriate. The violations concerning Mrs. Balasko’s account were the most extreme and least likely to be detected. This sets her apart from other Blevins family accounts in which violations occurred. The Division asks that, as to any civil penalties assessed, an identification be made as to amounts attributable to violations occurring before and after September 26, 1991, the date when Stout filed a petition for Chapter 13 bankruptcy. The violative activity for which the penalty is imposed lasted approximately fourteen months -- from July 1991 through August 1992. Thus, 3/14 of the penalty is charged for conduct occurring before September 26, 1991, and 11/14 for conduct occurring thereafter. VII. Record Certification Pursuant to Rule 351(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.351(b) (1998), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on April 10, 1997. ORDER Based on the findings and the conclusions set forth above, pursuant to Sections 8A of the Securities Act, Sections 15(b), 19(h), 21B, and 21C of the Exchange Act, I ORDER that J. STEPHEN STOUT: (1) is barred from being associated with any broker or dealer; (2) shall cease and desist from committing or causing any violations or future violations of Sections 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder; and (3) shall pay a civil penalty of $300,000. Payment of the penalty shall be made on the first day following the day this initial decision becomes final by certified check, U.S. Postal money order, bank cashier’s check or bank money order payable to the Securities and Exchange Commission. The check and a cover letter identifying the Respondent J. Stephen Stout and Administrative Proceeding No. 3- 9034, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Greenway, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission’s Division of Enforcement at the above address. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this initial decision may be filed within 21 days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within 21 days after service of the initial decision upon him, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. ____________________________ Carol Foelak Adminstrative Law Judge **FOOTNOTES** [1]: Additionally, the OIP alleged that Alfred M. Bauer failed reasonably to supervise Stout with a view to preventing his alleged violations. Respondent Bauer’s portion of these proceedings was settled. Alfred M. Bauer and J. Stephen Stout, Order Making Findings and Imposing Remedial Sanctions, 63 SEC Docket 0040 (Oct. 15, 1996). [2]: Citations are to the hearing transcript "(Tr.__ )" and to the exhibits admitted into evidence at the hearing. The Division exhibits are "(Div. Ex.__ )," and the Respondents exhibits are "(R’s Ex.__ )." [3]: 5 U.S.C. § 557(c). [4]: The Division’s November 18, 1996, Pre-Hearing Brief does not mention churning either. Its November 26, 1996, expert witness report (Mary E. Calhoun’s Analysis and Opinion) does include measurements related to churning -- annualized turnover rates and cost-to-equity ratios (break-even return) -- for the accounts at issue. [5]: The National Association of Securities Dealers (NASD) is a self- regulatory organization, operating under Commission supervision, of firms in the over-the-counter market. One of its basic purposes is to establish and enforce fair and equitable rules of securities trading. [6]: The clients of Partnership Arbitration signed a retainer agreement that waived any conflict of interest and provided that the individual registered representative would not be sued; they were also asked to sign a letter to the New York Stock Exchange exonerating the registered representative. Tr. 85-89. Stout and Andrews felt they, as well as the clients, had been misled. Tr. 1392-94. In November 1994 they were enjoined from the unauthorized practice of law as a result of being sued by Prudential and PaineWebber. Tr. 88, 1397, 1692-94. [7]: Div. Ex. 259 is Stout’s CRD report, an NASD report containing raw data concerning complaints. He has a pending lawsuit against the NASD and Prudential concerning the CRD data. Tr. 682. [8]: GNMA, also known as "Ginnie Mae," securities are backed by a pool of mortgages and guaranteed by the Government National Mortgage Association, a government-owned corporation which is an agency of the U.S. Department of Housing and Urban Development. John Downers & Jordan Elliot Goodman, Barron’s Dictionary of Finance and Investment Terms 219-220, 226 (4th ed. 1995). The risk to investors arises from the date of repayment of the mortgages’ principal; leverage increases the risk of loss and opportunity for profit arising from changes in the value of the securities. Tr. 1472-77; Div. Ex. 251 at Bates P0004635. [9]: The terms "limited partnerships" and "direct investments" are used interchangeably in this proceeding. Tr. 563. [10]: Both Prudential and PaineWebber entered settlements with the Commission pertaining to their conduct in the offer and sale of limited partnerships. PaineWebber, Inc., 61 SEC Docket 179 (Jan. 17, 1996) (sanctions included a $5 million civil penalty and an obligation to pay a total of $292.5 million to investors to resolve their claims relating to limited partnerships); Prudential Securities, Inc., 55 SEC Docket 720 (Oct. 21, 1993) (sanctions included a $10 million civil penalty). [11]: Prudential and Stout were defendants in a class action that arose out of the offer and sale of limited partnerships collectively known as the VMS Funds (later known as the Banyan Funds). The consolidated class action was originally filed April 30, 1990. Final judgment approving a class settlement was entered November 19, 1991. VMS Securities Litigation, 1992 U.S. Dist. LEXIS 1854, at **1-**3 (N.D. Ill. Feb. 20, 1992). Additionally, two customers filed suit on February 15, 1990, against Prudential and Stout in a Michigan court alleging securities fraud and misrepresentation concerning VMS, American Southwest Financial collateralized mortgage obligations, Prudential-Bache Strategic Income Fund, and Prudential-Bache Diversified Future Funds. In re VMS Securities Litigation, Sharp v. Stout, 1197 U.S. Dist. LEXIS 18666 (N.D. Ill. Nov. 6, 1997). [12]: 29 U.S.C. § 1001, et seq. (1997). [13]: ERISA values disseminated by the general partners originated from the DIG. Tr. 671-73. [14]: According to O’Sullivan, the ERISA values generally became available within one month of the close of the previous calendar year. Also, upon completion the values were posted on an internal marketing screen available to brokers. (Tr. 567-69.) [15]: It is not necessary to determine what their actual value was in making this finding in view of the wealth of evidence indicating that Stout was intent on presenting a misleading portrayal of their value. See Valicenti Advisory Services, Inc., et al., 1998 SEC LEXIS 2497, *7-*9 (Nov. 18, 1998). [16]: For example, Patty Blevins’ account bought PaineWebber Global Income Fund on September 4 and November 20, 1991. On February 28, 1992, the account sold it and bought Van Kampen Merritt Intermediate Term High Income Trust, which was sold on April 15 and May 13, 1992. On May 28, 1992, the account bought High Income Advantage Trust III. Div. Exs. 42A and B. Wayne Blevins’ account bought and sold PaineWebber Global Income Fund on the same dates as Patty Blevins’ transactions. Div. Exs. 47A and B. [17]: The meeting occurred in September or October, before Stout founded Partnership Arbitration in October. Tr. 1668-70. [18]: Ms. Calhoun explained that she excluded the limited partnerships because of their illiquidity. Additionally, the actual equity in the limited partnerships was unknown since for most of the period analyzed only the cost basis, rather than a valuation, was shown on the monthly account statements. Tr. 1221-22, 1271-75, 1277-78, 1302-03; Div. Ex. 248 at 5-6 n.1. She stated that there is considerable authority for excluding illiquid assets from a trading analysis; it is the way it is often, if not customarily, done. Tr. 1221-22, 1271-75, 1277-78, 1302-03. [19]: This is also known as the modified Looper formula. See Allen George Dartt, 48 S.E.C. 693, 695 & n.6 (1987). [20]: The prospectus for the offering indicates that $0.97 from every $15 share (or 6.5%) went to discounts and commissions. Generally, a broker is paid an enhanced sales credit on funds sold via an initial public offering. The total sales credit received by Stout on the purchase was 4.3%, or approximately twice the commission rate that would be paid on an open-market closed-end fund purchase. Div. Ex. 248. [21]: For example, in the Zweig Strategy Fund, an investor purchasing up to $49,999 would pay a sales charge of 5.5% on the entire purchase; an investor purchasing up to $50,000 - $99,000 would pay a sales charge of 5.0% sales charge. Div. Ex. 279. The higher the customer’s sales charge, the higher the registered representative’s commission credit. [22]: Rather than "rights of accumulation" and "letter of intent," the Zweig Strategy Fund prospectus uses the synonymous terms "cumulative quantity discount" and "letter of intention." [23]: The account was Stout’s, although Kyle Andrews was the registered representative of record on the account; they split the commissions. Tr. 1358, 1373, 1466. [24]: There is no evidence to the contrary in the record of this proceeding. Nor is there any evidence as to how Div. Ex. 190 came to be dated and signed with the Hergenreders’ names. [25]: Scienter is not required to establish a Section 17(a)(2) violation; a finding of negligence is adequate. Jay Houston Meadows, 61 SEC Docket 2444, 2453 n.16 (May 1, 1996), aff’d, 119 F.3d 1219 (5th Cir. 1997); SEC v. Steadman, 967 F.2d 636, 643 & n.5 (D.C. Cir. 1992) (citing Aaron, 446 U.S. at 701-02; Newcome v. Esrey, 862 F.2d 1099, 1102 n.7 (4th Cir. 1988)). [26]: Excluding the limited partnerships results in annual break even cost factors of 70% and 80% in the Balasko and Hergenreder accounts, respectively. The other accounts ranged from 14.7% to 24.82%. [27]: See, e.g., Exchange Act Sections 15(b)(6)(A) and 21B(a), (c), and (d). [28]: Neither the Commission nor any court of appeals has ruled on whether the Commission must find a likelihood of future violation to issue a cease and desist order. The courts have, however, ruled that a likelihood of future violation is required when considering the cease and desist authority of other administrative agencies. See Precious Metal Associates, Inc. v. CFTC, 620 F.2d 900, 912 (1st Cir. 1980); Borg-Warner Corp. v. FTC, 746 F.2d 108, 110-11 (2d Cir. 1984); NLRB v. Savin Business Machines Corp., 649 F.2d 89, 93 (1st Cir. 1981); Citizens State Bank v. FDIC, 751 F.2d 209, 214-15 & n.9 (8th Cir. 1984). Cease and desist authority was added to the sanctions available to the Commission in administrative proceedings by the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. As noted in the House Report on the legislation, other federal agencies, for example, the Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), National Labor Relations Board (NLRB), and each of the federal bank regulatory agencies, are empowered to issue cease and desist orders; a cease and desist order was described as an administrative remedy comparable to an injunction. H. Rep. 101-16, at 23-24 (1990). A likelihood of future violation is required for an injunction. SEC v. Steadman, 967 F.2d 636, 647-48 (D.C. Cir. 1992); United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953). [29]: The Commission increased the amounts for violations occurring after December 9, 1996. Adjustment to Civil Monetary Penalty Amounts, 61 Fed. Reg. 57773 (Nov. 8. 1996).