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UNITED STATES OF AMERICA
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In the Matter of ROGER FAN, Respondent. |
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ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDING, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding be instituted pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 ("Exchange Act") against Roger Fan ("Fan" or "Respondent").
In anticipation of the institution of this public administrative proceeding, Fan has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein (except that Fan admits the findings in II.A. below, and the jurisdiction of the Commission over him and over the subject matter of this proceeding), Fan consents to the entry of this Order Instituting Public Administrative Proceeding, Making Findings and Imposing Remedial Sanctions ("Order") set forth below.
Accordingly, IT IS HEREBY ORDERED that a proceeding pursuant to Section 15(b)(6) be, and hereby is, instituted.
II.
On the basis of this Order and the Offer of Settlement submitted by Fan, the Commission finds that:
A. RESPONDENT
Roger Fan from March through November 1999 was the president, sole compliance officer, and sole shareholder of U.S. Pacific Financial Services, Inc. ("US Pacific"), a California corporation registered with the Commission as a broker-dealer from January 1986 to July 2001. Fan holds series 4, 7, 24, 27, 28, 63, and 65 securities licenses. On July 20, 1998, in an unrelated matter, the National Association of Securities Dealers censured Fan and US Pacific and fined them jointly and severally $2,500 for failing to develop and maintain a continuing education program for registered persons.
B. FACTS
1. From March through November 1999, Wayne Miller, a registered representative subject to Fan's direct supervision, engaged in fraudulent practices with respect to the securities accounts of two unsophisticated customers with limited financial resources (the "Customers"). Among other things, Miller: 1) churned the accounts of the Customers, assuming de facto control over the accounts and executing excessive transactions in the accounts for the purpose of generating commissions and benefits for himself rather than managing the accounts in the best interests of the Customers; and 2) recommended and effected transactions which were unsuitable, given the Customers' investment objectives and financial circumstances.
2. From March through November 1999, Miller, who worked at a one person branch office of US Pacific in Beverly Hills, California, excessively traded options for the Customers, resulting in losses of over $275,000 for the Customers and generating $118,000 in commissions for Miller. The Customers were sisters in their late 50's who had no investment experience and possessed limited means. In only a nine-month period, Miller executed 121 options trades in one account and 108 options trades in the other account. This trading resulted in annualized turnover rates (i.e., how many times per year a customer's account equity is utilized to purchase securities) of 29.67 for the first account and 32.86 for the second account and a break-even cost factor (i.e., percentage of return-on-equity required for the account to break-even after paying for such costs as commissions and other fees) of 209.6% and 229.55% in the respective accounts. Miller entered into transactions and managed the Customers' accounts for the purpose of generating commissions rather than furthering his clients' interests. Miller had control of the Customers' accounts, and excessively traded in the accounts in light of the Customers' investment objectives.
3. Miller's options trading was also unsuitable for the Customers' financial situation and objectives. The Customers told Miller that they wanted conservative investments. Miller, nevertheless, engaged in high risk day trading of options. Miller never disclosed to the Customers that his options trading was unsuitable for them.
4. Miller misrepresented and omitted to disclose material information to the Customers regarding the suitability of his options trading. He did not advise the Customers of the risks of trading options. Miller represented to the Customers that he could recover their losses if they continued with his options trading. Miller had no basis for these statements. Furthermore, although he had never worked with a consultant, Miller told the Customers that he was no longer working with a consultant who had provided bad advice, to convince them to allow him to continue with the options trading. In fact, Miller had relied on various Internet sites and newsletters for assistance with his options trading.
5. As a result of the conduct described in the foregoing findings, Miller willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.1
6. Section 15(b)(6), incorporating by reference Section 15(b)(4)(E) of the Exchange Act, authorizes the Commission to impose sanctions against a person associated with a broker or dealer if it finds that it is in the public interest to do so and if that person has "failed reasonably to supervise with a view to preventing violations [of the federal securities laws], another person who commits such a violation, if such other person is subject to his supervision."
7. Fan had overall supervisory responsibility for all US Pacific employees, and was Miller's only supervisor. As US Pacific's president and sole compliance officer, Fan's duties included approving the opening of accounts, reviewing all order tickets generated by registered representatives, inspecting and reviewing branch office registered representatives such as Miller, and insuring registered representatives abided by the office policies and procedures manual (the "Manual").
8. Fan failed reasonably to supervise Miller with respect to his options trading for the Customers. First, Fan reviewed trading, account, and commission records. These documents showed a change from infrequent trading in conservative investments to frequent options trading in the Customers' accounts. Furthermore, they showed heavy losses and high commissions generated by the trading. Virtually all of Miller's income from March through November 1999 came from commissions earned on these accounts. Furthermore, Fan learned that one Customer was upset about the trading in her account and wanted to close her account. When faced with these red flags, however, Fan merely asked Miller whether the trading was authorized and suitable and the commissions were appropriate. Fan never spoke to the Customers. Had he inquired about the trading, he would have learned that the Customers did not understand options trading or the risks of that trading, did not authorize each trade, and were not happy with the trading. In light of the red flags, Fan's reliance on the unverified representations of Miller was unreasonable.
9. Fan abdicated his responsibilities for opening the options accounts and delegated this responsibility to Miller. He failed to verify the information on the account agreements, and he did not learn that the Customers lacked an understanding of options trading and that they did not receive required risk disclosures. Therefore, he failed to determine that the options trading was unsuitable for them.
10. Fan did not provide the Manual to Miller. US Pacific's policy required registered representatives to have the Manual at all times. The Manual contained several sections that prohibited Miller's options trading in the sisters' accounts, including: no options trading for customers unless the trading is suitable for the customer and the customer has been advised of the risks of options trading; no trading designed to reward the registered representative rather than meet the customer's needs; and no trades that result in a portfolio that has an unsuitable concentration or risk. The Manual defined churning and stated that churning was forbidden. It stated that the firm did not accept discretionary accounts. Furthermore, the registered representative was required to sign many provisions, including that related to unsuitable trading, acknowledging that he had read, understood, and agreed to abide by the provisions. Fan failed to give the Manual to Miller and to obtain Miller's signature to any provisions of the Manual. Fan did not take steps to ensure that the trades in the Customers' accounts were consistent with the Manual.
11. Fan failed to heed the numerous red flags regarding the transactions in the Customers' accounts. Additionally, he failed to abide by pertinent compliance policies and procedures concerning opening options accounts and trading in the accounts. As a result, Fan failed reasonably to supervise Miller with a view to preventing Miller's violations of the federal securities laws.
12. Fan has submitted a sworn Statement of Financial Condition dated May 28, 2002 and other evidence and has asserted his inability to pay a civil penalty. The Customers filed an arbitration claim with NASD Dispute Resolution, Inc. (NASD Arbitration Number 00-02492) which issued an arbitration award on November 13, 2001 holding Fan and Miller jointly liable in the amount of $685,986 in compensatory and punitive damages ("NASD Arbitration Award ").
III.
Based on the foregoing, the Commission deems it appropriate in the public interest to accept the Offer of Settlement submitted by Fan and impose the sanctions specified therein.
Accordingly, IT IS HEREBY ORDERED that:
A. Fan be and hereby is barred from association in any supervisory capacity with any broker or dealer with the right to reapply for association in a supervisory capacity after three years from the date of this Order to the appropriate self-regulatory organization, or, if there is none, to the Commission. No application for re-entry as a supervisor shall be approved until and unless the NASD Arbitration Award is satisfied.
B. Based upon Fan's sworn representations in his Statement of Financial Condition dated May 28, 2002 and other documents submitted to the Commission, the Commission is not imposing a civil penalty against Fan;
C. The Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Fan provided accurate and complete financial information at the time such representations were made; (2) seek an order directing payment of disgorgement and prejudgment interest; and (3) seek an order directing payment of the maximum civil penalty allowable under the law. No other issues shall be considered in connection with this petition other than whether the financial information provided by Fan was fraudulent, misleading, inaccurate or incomplete in any material respect. Fan may not, by way of defense to any such petition, (1) contest the findings in this Order; (2) assert that payment of disgorgement and interest should not be ordered; (3) contest the amount of disgorgement and interest to be ordered; (4) assert that payment of a penalty should not be ordered; (5) contest the imposition of the maximum penalty allowable under the law; or (6) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense.
By the Commission.
Jonathan G. Katz
Secretary
________________________
| 1 | On April 11, 2002, the Commission entered an order that, among other things, found Miller had willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, ordered him to cease-and-desist from such violations, barred him from association with any broker or dealer and prohibited him from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter. (In the Matter of Wayne Miller, Administrative Proceeding File No. 3-10755). |
http://www.sec.gov/litigation/admin/34-46359.htm
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