SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39543 / January 13, 1998 Admin. Proc. File No. 3-9190 : In the Matter of the Application of : : HATTIER, SANFORD & REYNOIR : 201 St. Charles Ave.; Suite 4204 : New Orleans, Louisiana 70170 : : and : : GUS A. REYNOIR : VANCE G. REYNOIR : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Violations of Rules Regarding Confirmation of Transactions Misrepresentation of Broker's Capacity on Confirmations Member firm of registered securities association, its president, and its municipal securities principal misrepresented that transactions were made on an agency, rather than on a principal, basis. Held, association's findings of violation are modified and sanctions imposed are sustained. APPEARANCES: Lamothe & Hamilton and Charles E. Hamilton, for Hattier, Sanford & Reynoir, Gus A. Reynoir, and Vance G. Reynoir. Alden S. Adkins, Norman Sue, Jr., and Shirley H. Weiss, for NASD Regulation, Inc. Appeal filed: November 25, 1996 Last brief filed: March 6, 1997 ======END OF PAGE 1====== I. Hattier, Sanford & Reynoir ("HS&R" or "the Firm"), a member of the National Association of Securities Dealers, Inc. ("NASD"); Gus A. Reynoir ("G. Reynoir"), the Firm s president, general securities principal, and municipal securities principal; and Vance G. Reynoir ("V. Reynoir"), a municipal securities principal and general securities representative of the Firm, (collectively, the "Applicants") appeal from NASD disciplinary action. <(1)> The NASD found that HS&R, acting through G. Reynoir and V. Reynoir, violated rules of the NASD and this Commission requiring that broker-dealers make and keep current books and records, <(1)> as well as our Rule 10b-10 under the Securities Exchange Act of 1934 ("Exchange Act") requiring that broker-dealers provide to customers an accurate written confirmation of a transaction at or before the completion of the transaction. The NASD (1) censured the Applicants; (2) fined the Applicants $60,000, jointly and severally; (3) required the Firm to engage an independent auditor within 90 days of the NASD decision and implement the auditor s recommendations to the satisfaction of NASD Regulation, Inc.; (4) suspended G. Reynoir and V. Reynoir for 30 days in any capacity (which suspensions shall not run concurrently); and (5) required that G. Reynoir and V. Reynoir requalify by examination as a general securities principal and as a municipal securities principal, respectively, within 180 days of the NASD decision or be suspended until <(1)>/ A fourth party to this action, Richard J. Bickerstaff, a registered representative of the Firm, has settled with the NASD and is not appealing here. <(1)>/ Section 4(a) of the NASD Government Securities Rules requires that members "keep and preserve books, accounts, records, memoranda, and correspondence in conformity with all applicable laws, rules, regulations and statements of policy promulgated thereunder." See NASD Manual (CCH) 2424 (1992). The NASD recently rescinded its Government Securities Rules pursuant to a rule change that provided that the NASD Rules of Fair Practice shall be applied to transactions in "exempted securities" (except for municipal securities). See Securities Exchange Act of 1934 Rel. No. 37588 (Aug. 20, 1996), 62 SEC Docket 1784 (approving NASD rule change). See also Section 3(a)(12) of the Securities Act of 1933 (defining the term "exempted securities" to include government securities). Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 ("Exchange Act") provide, in pertinent part, that broker-dealers "shall make and keep current . . . [c]opies of confirmations of all purchases and sales of securities," and preserve those copies for at least three years. ======END OF PAGE 2====== they requalify. <(1)> We base our findings on an independent review of the record. II. The NASD s allegations arise from a series of transactions effected by HS&R pursuant to a contract for investment services ("Contract") entered into by HS&R and the Commissioner of Insurance for the State of Louisiana ("Commissioner") in January 1993. The Commissioner was the court-appointed receiver for a number of failed or distressed insurance companies ("estates"). Pursuant to the Contract, HS&R was charged with managing a portfolio of assets held by various estates and with purchasing for the estates U.S. Government securities. For the first six months of the Contract, HS&R accurately confirmed its trades to the Commissioner. The Firm acted in a principal capacity <(1)> and confirmed the trades as a principal to the Commissioner, as well as to the First National Bank of Commerce ("FNBC"), the party from whom the Firm bought the securities in each of the transactions at issue here. In July 1993, the Firm s then-financial and operations limited principal ("FINOP") learned that the Firm was executing trades as principal and charging the Commissioner markups on the transactions. <(1)> The FINOP expressed strongly to Richard Bickerstaff, the registered representative at HS&R responsible for the Commissioner s account, his concern that executions in such a capacity could affect adversely the Firm s capital position. When the FINOP told Bickerstaff that HS&R should be executing trades for the Commissioner on an agency basis, Bickerstaff insisted that the Firm was required by the Contract to act in a principal capacity. The two men took their dispute to G. Reynoir, the Firm's president. G. Reynoir declined to resolve the matter and told his employees simply to "[d]o what's right." He said further, "[d]on't bother me with this. I've got my own problems." After that discussion, the Firm continued to execute trades under the Contract in a principal capacity, but began to confirm them as agency trades to both the Commissioner and FNBC, and to designate erroneously the Firm's markups on these trades as commissions. FNBC's confirmations to HS&R consistently stated, however, that HS&R had acquired the securities as principal. Between July 20 and September 20, 1993, the Firm confirmed 280 transactions to the Commissioner as agent, when in fact the Firm had acted <(1)>/ The NASD also assessed costs. <(1)>/ That is, HS&R bought the securities for its own account and then sold them to the Commissioner, charging a markup on the transaction. <(1)>/ The Firm's then-FINOP is not a party to this proceeding and did not testify at the hearing in this matter. ======END OF PAGE 3====== as principal. G. Reynoir reviewed and approved the erroneous confirmation tickets for each of the 280 transactions, initialing each ticket in the lower left hand corner. In September 1993, Charles Reichman, Director of Accounting and Investments for the Commissioner and the person responsible for administering the Contract, <(1)> requested that HS&R no longer confirm trades to the Commissioner as agency trades. In doing so, Reichman expressed the concern that payment of a commission, rather than a markup, might violate the terms of the Contract. <(1)> The Firm responded with an offer to cancel and rebook the 280 erroneous confirmations issued between July 20 and September 20, 1993, to indicate that the trades were conducted in a principal capacity, but Reichman stated that he would prefer to "let sleeping dogs lie." The Firm, on Reichman's instructions, did not correct the erroneous tickets. Both Reynoirs, by their own admission, knew of the erroneous confirmations, but made no effort to correct them. In 173 transactions conducted between September 29, 1993, and October 31, 1994, HS&R continued to confirm trades to the Commissioner as agent when they in fact were principal trades. In response to Reichman's concerns, however, HS&R omitted reference to any commission earned or markup charged. <(1)> HS&R's confirmations to FNBC nonetheless continued to reflect (erroneously) that the Firm had charged commissions on those 173 trades. FNBC, in turn, continued to send confirmations to HS&R stating that HS&R had acquired the securities as principal. G. Reynoir reviewed and approved the erroneous confirmations for each of these 173 transactions, again initialing each in the lower left hand corner. <(1)>/ Charles Reichman did not testify at the hearing in this matter. <(1)>/ The issue of whether the Contract authorized HS&R to charge commissions is not before us. <(1)>/ The NASD in its brief to us cites testimony from G. Reynoir that he told Bickerstaff and the Firm s FINOP to "do what the customer [Reichman] wants." The NASD relies on this testimony to demonstrate that G. Reynoir ordered his staff to confirm these transactions to the Commissioner as agency trades and to omit disclosure of commissions or markups. G. Reynoir, however, subsequently elaborated on this testimony by stating that, while he had instructed his staff to "do what the customer wants," it was his understanding that what the customer -- Reichman -- had requested was that the Firm issue confirmations showing that the Firm was acting in a principal capacity. ======END OF PAGE 4====== In late 1994 or early 1995, HS&R hired a new FINOP. <(1)> At her direction, between January 1995 and March 1995 (when the Commissioner terminated the Contract), all confirmations issued by HS&R to the Commissioner under the Contract correctly showed that HS&R had acted as principal. In early 1995, Reichman again approached HS&R about the 280 erroneous confirmations issued between July 20 and September 20, 1993, and asked that the confirmations be restated to show that the Firm had acted as principal in the transactions. <(1)> At V. Reynoir's direction, the Firm canceled and rebooked the confirmations for these transactions. At Reichman s request, the Firm did not issue to the Commissioner the restated confirmations, but, rather, retained them at the Firm. III. The Applicants do not dispute that HS&R acted on a principal, not agency, basis in the 453 transactions at issue. Nor do they dispute that HS&R misrepresented in its confirmations to the Commissioner the capacity in which the Firm acted in these transactions. We therefore find, as did the NASD, that the Firm violated Exchange Act Rule 10b-10. <(1)> <(1)>/ The Firm s new FINOP, who is not a party to this proceeding, testified before the District Business Conduct Committee. <(1)>/ In early 1995, the Louisiana state legislature, as well as state and federal prosecutors, began investigating whether the Commissioner or members of his office, including Reichman, had improperly procured or administered the Contract. These investigations generated a great deal of publicity. They revealed that Bickerstaff, HS&R s employee, had executed a secret agreement with Reichman to provide investment advice to the Commissioner s office and had been paying money to Reichman to prevent disclosure of this agreement. Reichman and Bickerstaff were convicted of extortion and misprision of a felony, respectively. The NASD has not alleged that the Applicants knew of the secret agreement between Reichman and Bickerstaff or benefited from the agreement. <(1)>/ We do not find, however, that the Firm violated Section 4 of the NASD Government Securities Rules or Exchange Act Rules 17a-3 and 17a-4. As applicable here, these rules require that broker-dealers make accurate copies of the confirmations that they send to their customers and preserve such copies for a period of three years. The NASD has not alleged that the Applicants made inaccurate copies of the confirmations that it sent to the Commissioner, nor has it (continued...) ======END OF PAGE 5====== The Applicants defend the charges against the Reynoirs on the ground that the Reynoirs assertedly did not authorize or knowingly participate in the preparation of the inaccurate confirmations. This defense is unavailing. <(1)> The Reynoirs' respective roles at the Firm, varied involvement in the issuance of the confirmations, and failure to correct the erroneous confirmations lead us to conclude that they are responsible for the Firm s violations. G. Reynoir served as HS&R s president, was designated (with V. Reynoir) as the HS&R principal whose duty it was "to recommend appropriate actions to achieve member compliance with applicable rules and regulations," and was responsible for supervising the work of Bickerstaff on the Commissioner's account. In July 1993, G. Reynoir abdicated his responsibilities when Bickerstaff and the Firm s FINOP came to him with a significant compliance issue and G. Reynoir declined to offer his employees any guidance on its resolution. Subsequently, G. Reynoir reviewed and approved each of the hundreds of inaccurate confirmations that the Firm sent to the Commissioner. <(1)> Furthermore, G. Reynoir acquiesced in <(1)>(...continued) alleged that they failed to preserve such copies for the requisite period of time -- the principal allegations here are that the underlying confirmations were inaccurate, not that the copies made and preserved of these confirmations were inaccurate. <(1)>/ The Applicants also claim that the Firm s misrepresentation of the capacity in which it executed the transactions at issue did not cause its customer to suffer any loss, and, because the Firm was in fact effecting the trades on a principal basis, HS&R did not actually limit its financial exposure or enjoy any other advantage. These claims, however, do not relate to the elements of a Rule 10b-10 violation. The purpose of Rule 10b-10 is to ensure full disclosure to investors of the terms of the transactions that they conduct with their broker-dealers. See infra n.16 (discussing the purpose of Rule 10b-10). <(1)>/ The Applicants contend that G. Reynoir s approval of these confirmations was inadvertent. They claim that the Firm was doing business with many insurance companies that were not in receivership and for which the Firm was acting as an agent. They accordingly suggest that G. Reynoir, during the relevant period, also reviewed confirmations for insurance company clients for whom the Firm acted in an agency capacity, and may have gotten those confirmations confused with confirmations for the estates, for which the Firm acted only in a principal capacity. In addition, G. Reynoir states that he often was rushed to review that day s confirmations, stating, for instance, that [i]f you ve got (continued...) ======END OF PAGE 6====== Reichman s request that he let sleeping dogs lie, rather than taking the only proper course -- directing that the 280 confirmations issued to the Commissioner by his Firm between July and September 1993 be corrected as soon as Reichman raised the issue of whether the capacity in which the transactions had been effected had been misstated. The Firm, as noted above, also had designated V. Reynoir as an HS&R principal whose duty it was "to recommend appropriate actions to achieve member compliance with applicable rules and regulations." V. Reynoir testified before the District Business Conduct Committee ("District Committee") that it was brought to his attention in September 1993 that the confirmations issued to the Commissioner between July 20 and September 20, 1993, were inaccurate, but that neither he nor the Firm did anything to correct the confirmations. V. Reynoir's failure to pursue correction of the July 1993 through September 1993 confirmations when the errors were brought to his attention was an abdication of his compliance duties. With respect to the subsequent confirmations, V. Reynoir attempted to distance himself from them with the explanation, offered to the District Committee, that he was "not day-to-day that involved" with the performance of the Contract. We agree with the NASD that, given V. Reynoir's position at the Firm, V. Reynoir should be disciplined for his failure to follow up with respect to the accuracy of these subsequent confirmations sent by the Firm to the Commissioner. IV. The applicants seek a reduction of the $60,000 joint and several fine and relief from the 30-day suspensions. <(1)> They do not contest the NASD s requirement that the firm retain an outside auditor to review its books and supervisory procedures. Over the course of more than fifteen months, the Applicants issued more than 450 confirmations that misrepresented the capacity in which the <(1)>(...continued) a hundred tickets to check like this and its six o clock at night and your wife says we re having company for dinner, you d better get here, I m checking these [] tickets pretty quick. These claims are neither persuasive on their face nor supported by the record, which indicates, among other things, that, during the period at issue, the Commissioner was the Firm s most important client. <(1)>/ The Applicants argue that the Firm is unable to pay a $60,000 fine. The fine, however, is joint and several and the Applicants do not contend that G. Reynoir or V. Reynoir is unable to pay the fine. Additionally, the NASD, in certain circumstances, makes available an installment plan under which respondents may satisfy their fines by executing promissory notes and paying over time. ======END OF PAGE 7====== Firm was executing transactions. <(1)> Given the scope and magnitude of the violations we have found here, <(1)> <(1)>/ We note that the National Business Conduct Committee ("National Committee"), in discussing its sanctions, mistakenly stated that the Firm, in September 1993, canceled and rebooked confirmations for the trades conducted between July 20 and September 20, 1993, but then continued for another 13 months to confirm trades as agent when it was acting as principal. While the record indicates that the confirmations were corrected in 1995, and that the Firm generated no additional erroneous confirmations thereafter, the record also establishes that the Applicants knew well before 1995 that erroneous confirmations were being sent to the Commissioner but made no effort until 1995 to correct them. <(1)>/ Exchange Act Rule 10b-10 works to protect investors and combat broker-dealer fraud by ensuring full and fair disclosure to investors of the substance of the transactions effected by their brokers. See Protective Group Securities Corp., 51 S.E.C. 1233, 1242 (1994) (stating that Exchange Act Rule 10b-10 is a "central tenet[] of the regulatory scheme that it is our duty to enforce"); Bison Securities, Inc., 51 S.E.C. 327, 333 (1993) ("The purpose of Rule 10b-10 is to provide the customer with fair disclosure of the nature of the transaction and the capacity in which the broker-dealer operates."). ======END OF PAGE 8====== we do not conclude that the sanctions imposed are either excessive or oppressive. <(1)> An appropriate order will issue. <(1)> By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY, and UNGER). Jonathan G. Katz Secretary <(1)>/ The NASD s Sanction Guidelines suggest that for a misrepresentation of fact, a suspension of between five and 60 days is appropriate, and, in cases where "aggravating factors exist," a longer suspension should be considered. See NASD Sanction Guidelines at 34 (1996). The relevant NASD sanction guideline also suggests a fine of between $5,000 and $50,000. While the fine imposed by the NASD here exceeds that suggested in the Guidelines, the NASD Sanction Guidelines do not specify required sanctions but merely provide a "starting point" in the determination of remedial sanctions. Peter C. Bucchieri, Exchange Act Rel. No. 37218 (May 14, 1996), 61 SEC Docket 2771, 2779 and n.17 (quoting Peter W. Schellenbach, 50 S.E.C. 798, 803 (1991), aff'd, 989 F.2d 907 (7th Cir. 1993)). Here, the NASD was presented with a pattern of wrongdoing that persisted for more than 15 months and encompassed hundreds of transactions. The NASD s National Business Conduct Committee ("National Committee") referenced the NASD sanction guideline for recordkeeping violations in imposing the sanction here. We have determined to vacate the NASD's findings of record- keeping violations and note that the fine recommended in the Guidelines for a recordkeeping violation is substantially less than that recommended for a misrepresentation of fact. Compare NASD Sanction Guidelines at 40 (fine of between $1,000 and $20,000 suggested for recordkeeping violations). <(1)>/ All of the contentions made by the parties have been considered. Their arguments are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. ======END OF PAGE 9====== UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. Admin. Proc. File No. 3-9190 : In the Matter of the Application of : : HATTIER, SANFORD & REYNOIR : 201 St. Charles Ave.; Suite 4204 : New Orleans, Louisiana 70170 : : and : : GUS A. REYNOIR : VANCE G. REYNOIR : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER MODIFYING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that the findings of violation of Rule 10b-10 under the Securities Exchange Act of 1934 made by the National Association of Securities Dealers, Inc. ("NASD"), against Hattier, Sanford & Reynoir, Gus A. Reynoir, and Vance G. Reynoir be, and they hereby are, sustained, and that the findings of violation of Section 4(a) of the NASD Government Securities Rules and Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 be, and they hereby are, vacated; and, it is further ORDERED that the sanctions imposed by the NASD against Hattier, Sanford & Reynoir, Gus A. Reynoir, and Vance G. Reynoir be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 10======