91-192-201

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N E W Y O R K S T O C K E X C H A N G E, I N C.

EXCHANGE HEARING PANEL DECISION 91-192 November 15, 1991

PAINEWEBBER INCORPORATED

MEMBER ORGANIZATION

* * *

Permitted or failed to prevent solicitation and

recommendation by one or more registered

representatives of customer purchases of one or more

securities unsuitable for the customers; violated

Exchange Rule 723 by permitting or failing to

prevent the recommendation by one or more of its

registered representatives of unsuitable options

transactions for customers; violated Exchange Rule

431(f) (7), (8) and (9) and Regulation T by

permitting customers and employees to engage in

practices, or failing to cancel or otherwise

liquidate transactions, in their accounts,

prohibited by such rule and regulation; violated

Exchange Rule 351 by failing to make timely reportsof certain events; violated Exchange Rule 342 by

failing to conduct annual supervisory branch office

inspections, failing to maintain adequate written

tables of supervision, and failing to maintain

appropriate procedures for supervision and control

of sales practice activities -- Consent to censure,

fines totalling $900,000, and special internal

review of sales practice policies and procedures.

* * *

EXCHANGE HEARING PANEL DECISION 91-193

LEE HAROLD LOVEJOY

FORMER BRANCH OFFICE MANAGER


ROBERT BRADLEY FULLER



DAVID WARD STANGER

BRANCH OFFICE MANAGER

Violated Exchange Rule 342(a) with respect to

supervisory duties and obligations -- Consent to

censure, $15,000 fine, and three week supervisory

suspension.

* * *


SHELDON ALAN CHAIKEN

FORMER DIVISION MANAGER


GARY PRICE EVANS

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DIVISION MANAGER


JOHN ARNOLD McFERRAN



DONALD DELIA DEST




censure, $10,000 fine, and two week supervisory

suspension.

* * *


BURGESS ASKEW DAVISFORMER BRANCH OFFICE MANAGER



censure, $10,000 fine, and one week supervisory

suspension.

* * *


WILLIAM OGRAM WEBSTER, JR.




censure, $5,000 fine, and one week supervisory

suspension.

* * *

Appearances:

For the Division of Enforcement For the Respondents

Regina C. Mysliwiec, Esq. Robert M. Berson, Esq.

Rex W. Mixon, Jr., Esq. (For PaineWebber)

Susan J. Meltzer, Esq. John F. X. Peloso, Esq.

Howard A. Grinsberg, Esq. Jane M. Knight, Esq.Henry A. Harrison, Esq. (For PaineWebber, Lovejoy, Chaiken,

Evans, McFerran, Dest, Davis, Webster

John R. Loftus, Esq.

(Fuller, Stanger, Evans)

Timothy A. Baker, Esq.

(McFerran, Dest)

An Exchange Hearing Panel met to consider a Stipulation of Facts

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and Consent to Penalty entered into between the Exchange's

Division of Enforcement and PaineWebber Incorporated (the

"Firm"), a member organization, and Lee Harold Lovejoy, Sheldon

Alan Chaiken, Robert Bradley Fuller, David Ward Stanger,

Gary Price Evans, John Arnold McFerran, Donald Delia Dest,

Burgess Askew Davis, and William Ogram Webster, Jr. During the

relevant periods discussed in this Stipulation and Consent,

Messrs. Lovejoy, Fuller, Stanger, McFerran, Dest, Davis and

Webster were branch office managers with the Firm; Messrs.

Chaiken and Evans were Division Managers with the Firm.

For the sole purpose of settling this disciplinary proceeding,

prior to a hearing or adjudication of any issue of law or fact,

and without admitting or denying any allegations, facts,

conclusions or findings set forth herein, the Firm consents to a

finding by the Hearing Panel that it:

I. Engaged in conduct inconsistent with just and equitableprinciples of trade in that, on various occasions during

1984-1987, it permitted or failed to prevent the

solicitation and recommendation by one or more of its

registered representatives of customer purchases of one

or more securities where such securities were unsuitable

for the customers.

II. Violated Exchange Rule 723 in that, on various occasions

during 1984-1987, it permitted or failed to prevent the

recommendation by one or more of its registered

representatives of opening transactions in option

contracts for customers where the person making the

recommendation did not have a reasonable basis for

believing, at the time of making the recommendation, that

the customers had such knowledge and experience in

financial matters that such customers could reasonably be

expected to be capable of evaluating the risks of the

recommended transactions and financially able to bear the

risks of the recommended positions in the option

contracts.

III. Violated Exchange Rule 431(f)(7), (8) and (9), and

section 220.8 of Regulation T of the Board of Governors

of the Federal Reserve System in that, on various

occasions during 1984-1987, it permitted customers and

employees to engage in practices, or failed to cancel or

otherwise liquidate transactions, in their accountsprohibited by such rule and regulation.

IV. Violated Exchange Rule 351 in that, during the period

1987-1990, it failed to report to the Exchange in a

timely manner certain events as required by such rule.

V. Violated Exchange Rule 342(a) and (b) in that, during the

period 1985-1988, it failed to conduct supervisory

inspections of certain branch offices at least annually.

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VI. Violated Exchange Rule 342(a) and (b) in that, during the

period 1984-1988, it failed to maintain written tables of

supervision identifying the person with overall

responsibility for internal supervision and control of

the Firm and compliance with securities laws and

regulations, as well as identifying the supervisory

responsibility for each area of the Firm's business

activities.

VII. Violated Exchange Rule 342(a) and (b) in that, during the

period 1984-1988, it failed to provide for, establish,

and maintain appropriate procedures of supervision and

control, including a separate system of follow-up and

review, with respect to its sales practice activities to

prevent the foregoing violations.




conclusions or findings set forth herein:

Mr. Lovejoy consents to a finding by the Hearing Panel that he

violated Exchange Rule 342(a) in that he failed to reasonably

discharge his duties and obligations in connection with the

supervision and control of a registered representative of his

member organization employer subject to his supervision and

control.

Mr. Chaiken consents to a finding by the Hearing Panel that he



supervision and control of a registered representative, and of

Mr. Lovejoy, a branch office manager, of his member organization

employer subject to his supervision and control.

Mr. Fuller consents to a finding by the Hearing Panel that he





control.

Mr. Stanger consents to a finding by the Hearing Panel that he




member organization employer subject to his supervision andcontrol.

Mr. Evans consents to a finding by the Hearing Panel that he



supervision and control of two registered representatives, and of

Mr. Fuller and Mr. Stanger, branch office managers, of his member

organization employer subject to his supervision and control.

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Mr. McFerran consents to a finding by the Hearing Panel that he





control.

Mr. Dest consents to a finding by the Hearing Panel that he





control.

Mr. Davis consents to a finding by the Hearing Panel that he





control.

Mr. Webster consents to a finding by the Hearing Panel that he





control.




conclusions or findings set forth herein, the Firm and Messrs.

Lovejoy, Chaiken, Fuller, Stanger, Evans, McFerran, Dest, Davis

and Webster consent to the Hearing Panel adopting certain

findings of fact, the substance of which follows:

Background and Jurisdiction

The Firm

1. The Firm is a subsidiary corporation of PaineWebber Group

Inc., a holding company whose securities are listed on

the Exchange.

2. The Firm is the successor to a business founded in 1879

and is currently one of the largest national full-service

securities firms in the United States. The Firm is a

major broker in securities, options, and commodities.The Firm also acts as a dealer in corporate, municipal

and U.S. Government securities and is a distributor of

mutual funds, tax shelters, life insurance and annuity

products.

3. The Firm is a member organization of the Exchange, which

is the Firm's designated examining authority and

principal regulator. The Firm is also a member of

various domestic and foreign securities and commodities

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exchanges, and the National Association of Securities

Dealers, Inc.

4. At December 31, 1990, the Firm had approximately 4,500

registered representatives in 272 branch offices in the

United States.

5. The Exchange's Division of Member Firm Regulation

conducted sales practice examinations of the supervisory

standards and sales practice procedures established and

maintained at the Firm for the period 1985-1988, and set

forth their findings in three reports. The sales

practice examinations covered visits and reviews at the

Firm's main office and 49 different branch offices. A

copy of each report was provided to the Firm at the

conclusion of each examination. Thereafter, the Division

of Enforcement conducted an extensive investigation of

firm-wide systems and procedures and ten branch offices.

Lovejoy - Branch Office Manager Philadelphia (Eastern Division)

6. Lovejoy was born on July 19, 1936. He entered the

securities industry in 1965 as a registered

representative with the Firm. During the period 1984-

1988, Lovejoy was the manager of the Firm's branch office

in Philadelphia, Pennsylvania. In April 1988, Lovejoy

left the Firm and joined another securities firm, where

he is currently employed as a branch office manager.

7. During the period when Lovejoy was the manager of the

Firm's branch office in Philadelphia, Lovejoy was

responsible for the supervision and control of the sales

practice activities of employees in that office,

including the activities of registered representative A.

Chaiken - Division Manager (Eastern Division)

8. Chaiken was born on September 23, 1934. He entered the


representative with the Firm. During the period 1984-

1987, Chaiken was the Division Manager of the Firm's

Eastern Division. Chaiken is currently employed by the

Firm.

9. During the period when Chaiken was the Division Manager

of the Firm's Eastern Division, Chaiken was responsiblefor the supervision and control of the sales practice

activities of various branch offices in the Eastern

Division, including the activities of the Philadelphia

branch office.

10. During the period when Chaiken was the Division Manager

of the Firm's Eastern Division, Lovejoy reported to

Chaiken.

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Fuller - Branch Office Manager Pasadena (Southern Pacific

Division)

11. Fuller was born on January 15, 1938. He entered the


representative with another firm. In 1973, Fuller joined

the Firm. During the period 1983 - 1987, Fuller was the

manager of the Firm's branch office in Pasadena,

California. In May 1987, Fuller left the Firm. Fuller

is currently employed by another securities firm.

12. During the period when Fuller was the manager of the

Firm's branch office in Pasadena, Fuller was responsible

for the supervision and control of the sales practice

activities of employees of that office, including the

activities of registered representative B.

Stanger - Branch Office Manager Santa Barbara (Southern Pacific

Division)

13. Stanger was born on October 23, 1947. He entered thesecurities industry in 1968 as a registered

representative with another firm. In 1976, Stanger

joined the Firm. During the period 1984 to date, Stanger

was the manager of the Firm's branch office in Santa

Barbara, California. Stanger is currently employed by

the Firm.

14. During the period when Stanger was the manager of the

Firm's branch office in Santa Barbara, Stanger was



including the activities of registered representative C.

Evans - Division Manager (Southern Pacific Division)

15. Evans was born on October 10, 1938. He entered the


representative with the Firm. During the period 1982 to

date, Evans was the Division Manager of the Firm's

Southern Pacific Division. Evans is currently employed

by the Firm.

16. During the period when Evans was the Division Manager of

the Firm's Southern Pacific Division, Evans was


practice activities of various branch offices in the

Southern Pacific Division, including the activities ofthe Pasadena and Santa Barbara branch offices.

17. During the period when Evans was the Division Manager of

the Firm's Southern Pacific Division, Fuller and Stanger

reported to Evans.

McFerran - Branch Office Manager Boulder (Central Southwest

Division)

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18. McFerran was born on February 26, 1940. He entered the


representative with another firm. In 1983, McFerran

joined the Firm. During the period 1983 to July 1990,

McFerran was the manager of the Firm's branch office in

Boulder, Colorado. McFerran is currently employed by the

Firm.

19. During the period when McFerran was the manager of the

Firm's branch office in Boulder, McFerran was responsible


activities of employees in that office, including the

activities of registered representative D.

Dest - Branch Office Manager New Haven (New England Division)

20. Dest was born on June 2, 1925. He entered the securities

industry in 1960 as a registered representative with

another firm. In June 1978, he joined Blyth Eastman

Dillon Co. which was acquired in 1980 by the Firm.

During the period 1985 to January 1991, Dest was themanager of the Firm's branch office in New Haven,

Connecticut. Dest is currently employed by the Firm.

21. During the period when Dest was the manager of the Firm's

branch office in New Haven, Dest was responsible for the

supervision and control of the sales practice activities

of employees in that office, including the activities of

registered representative E.

Davis - Branch Office Manager Louisville (Southeast Division)

22. Davis was born on December 13, 1948. He entered the


representative with another firm. In July 1976, Davis

joined the Firm. During the period 1984-August 1987,

Davis was the manager of the Firm's branch office in

Louisville, Kentucky. Davis is currently employed by the

Firm.

23. During the period when Davis was the manager of the

Firm's branch office in Louisville, Davis was responsible


activities of employees in that office, including the

activities of registered representative F.

Webster - Branch Office Manager Fairfield (New England Division)

24. Webster was born on July 5, 1943. He entered the

securities industry in June 1972 as a registered

representative with Blyth Eastman Dillon & Co. which was

acquired in 1980 by the Firm. During the period May

1985-May 1991, Webster was the manager of the Firm's

branch office in Fairfield, Connecticut. Webster is

currently employed by the Firm.

25. During the period when Webster was the manager of the

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Firm's branch office in Fairfield, Webster was



including the activities of registered representative G.

Summary

26. The Exchange's sales practice examinations brought to the

attention of the Firm the existence of recurring sales

practice deficiencies. During the period 1984-1987,

there were a number of indications (internal memoranda,

active account reports, etc.) which alerted supervisory

personnel to deficiencies. However, inadequate

corrective action was taken by supervisory personnel,

including two Division Managers and seven Branch Office

Managers. Moreover, the Firm failed to take adequate

steps during that time period to adopt or enforce

existing procedures designed to prevent such sales

practice deficiencies.

27. The Firm's inadequate supervision and control during thistime period resulted, in part, from its failure to

establish a separate system of follow-up and review to

determine whether existing procedures were being enforced

with respect to several areas, for example, active

account review and concentration reports. In some

instances, the Firm failed to delineate clearly

supervisory authority for an area of its business

activities, for example, the enforcement of trading

restrictions. In other cases, the Firm's supervision of

certain of its largest producers was inadequate to

prevent continuing misconduct over long periods of time.

28. In certain instances, sales practice violations and

supervisory deficiencies resulted in hundreds of customer

complaints and millions of dollars in settlements with

customers.

Failure to Comply With Sales Practice Requirements

at Different Branch Offices

Philadelphia Branch Office

29. During the period 1984-1987, A, a salesman in the Firm's

branch office in Philadelphia, solicited customers to

purchase the securities of XYZ, a company engaged in the

manufacture and sale of electronic technology. The

common stock of XYZ was listed on another stock exchange.

30. During the period 1984-1987, A recommended and effected

purchase transactions in XYZ for customers at a time when

there were already concentrated positions in XYZ of more

than 10% of the outstanding shares held in existing

customer accounts of A. During the period January 1984-

August 1985, 50% to 75% of the total XYZ positions held

by A's customers were held on margin, and during the

period September 1985-December 1987, 25% to 50% of such

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XYZ positions were held on margin.

31. During the period 1984-1987, monthly concentration

reports were prepared and distributed to various managers

at the Firm, including Lovejoy and Chaiken, which showed

that during this four year period, 75 to 150 customer

accounts of A held from 11% to 17% of the outstanding

shares of XYZ. The monthly concentration reports also indicated

that during the period January 1984-August 1985, 50% to 75% of

the total XYZ positions held by A's customers were held

on margin; and that during the period September 1985-

December 1987, 25% to 50% of such XYZ positions were held

on margin.

32. For example, as of October 4, 1986, 121 customer accounts

of A held 583,367 shares or more than 15% of the

outstanding shares of XYZ. During 1986, the average

daily trading volume of XYZ was approximately 10,500

shares per day. At that time, XYZ traded in a price

range of $13 to $14 per share.

33. A year later, the concentration of XYZ in customer

accounts of A had increased. The October 1987 monthly

concentration report stated that 158 customer accounts of

A held 697,324 shares or more than 17% of the outstanding

shares of XYZ. During 1987, the average daily trading

volume of XYZ was approximately 10,000 shares per day.

At the end of October 1987, XYZ traded at a price of $11

per share.

34. During 1984-1987, the Firm's policy and procedures

required that in response to each monthly concentration

report on XYZ, the accounts holding XYZ should have been

reviewed to determine whether XYZ was suitable for each

customer.

35. Reviews conducted to determine whether concentrated

positions in XYZ were suitable for the customers were

inadequate.

36. During the period 1984-1987, active account reports for

customer accounts of A were prepared and distributed to

various managers at the Firm, including Lovejoy, to

identify accounts with 10 or more trades or commissions

of $1,000 or more for the prior month. The active

account reports showed the number and dollar value of all

transactions, indicated the amount of commissions, and

attached a copy of the monthly statement for the account.

37. The Firm's procedures and the active account reports

required that the activity in such accounts "be reviewed

in conjunction with the client's statement and the

financial resources and investment objectives as shown on

this report." Reviews conducted to determine whether the

trading in XYZ was suitable for the customers were

inadequate.

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38. During the period 1984-1987, reports were prepared and

distributed to various managers at the Firm, including

Lovejoy and Chaiken, which showed a large number of trade

corrections and account number changes for purchases of

XYZ in customer accounts of A. Reviews conducted to

determine whether the trading in XYZ identified by such

reports was authorized by the customers were inadequate.

39. During 1984-1987, the continued solicitation and

recommendation of purchases of XYZ by A were unsuitable

for various customers in view of their financial

resources, investment experience, and investment

objectives. The purchases of XYZ were also unsuitable in

view of the concentrated positions of XYZ then held in

customer accounts at the Firm and the illiquid nature of

such positions.

40. During 1984-1987, the Firm permitted or failed to prevent

the solicitation and recommendation by A of purchases of

XYZ which were unsuitable for the customers.

41. During the period 1984-1987, A was the largest producer

in the Philadelphia branch office and one of the largest

producers in the Firm.

42. In late 1987, numerous customers of the Firm complained

to the Firm regarding the way A handled their accounts

during 1984-1987, claiming that unauthorized and

unsuitable purchases of XYZ were made in their accounts.

The Firm reviewed such complaints and contacted customers

regarding trading of XYZ in their accounts. During

December 1987, the price of XYZ had fallen as low as $5

1/2 per share.

43. On December 7, 1987, the Firm terminated A's employment.

44. As of March 1991, the Firm had received complaints from

approximately 93 customers of A regarding the trading in

their accounts at the Philadelphia branch office. As of

March 1991, the Firm had paid a total of more than $3

million to resolve customer complaints.

Branch Office Manager for Philadelphia

45. During 1984-1987, Lovejoy, the branch office manager for

the office in Philadelphia, did not provide reasonable

supervision and control of the activity of A describedabove, including:

a. Lovejoy received and reviewed on a daily basis order

tickets for transactions in the customer accounts of

A.

b. Lovejoy received and approved reports showing a large

number of trade corrections and account number changes

for purchases of XYZ in customer accounts of A, but

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Lovejoy failed to take adequate steps to determine

whether A was transferring unauthorized trades in XYZ

from customer accounts and to prevent such activity.

c. Lovejoy received and reviewed active account reports

for customer accounts of A.

d. After receiving one or more such active account

reports, Lovejoy failed to conduct adequate reviews of

the activity in such customer accounts or take

adequate steps to determine whether such trading was

authorized and suitable for the customers.

e. Lovejoy received monthly concentration reports during

1984-1987 which showed that customer accounts of A

held concentrated positions in XYZ. The monthly

concentration reports also indicated that during the

period January 1984-August 1985, 50% to 75% of the

total XYZ positions held by A's customers were held on

margin; and that during the period September 1985-

December 1987, 25% to 50% of such XYZ positions wereheld on margin.

f. After receiving one or more such monthly concentration

reports, Lovejoy failed to follow the Firm's

procedures with respect to concentrated security

positions in that, among other things, he did not

conduct adequate reviews of customer accounts holding

XYZ to determine whether XYZ was suitable for such

customers, and did not prepare a statement confirming

the suitability of XYZ for such customers.

g. After receiving one or more such monthly concentration

reports, Lovejoy failed to take adequate steps to

prevent A's continued solicitation and recommendation

of purchases of XYZ.

h. Lovejoy failed to take appropriate action to prevent

the unsuitable trading in XYZ which occurred in

customer accounts of A.

Division Manager for Philadelphia

46. During 1984-1987, Chaiken, the division manager for the

Firm's Eastern Division, which included the branch office

in Philadelphia, did not provide reasonable supervision

and control of the activity of Lovejoy and of A described

above, including:

a. Chaiken failed to take adequate steps to ensure that

the Firm's procedures were followed with respect to

the review of active accounts. For example, Chaiken

failed to cause Lovejoy to review customer accounts of

A identified by active account reports to determine

whether such trading was authorized and suitable for

the customers.

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b. Chaiken received monthly concentration reports during

1984-1987 which showed that customer accounts of A

held concentrated positions in XYZ. The monthly

concentration reports also indicated that during the

period January 1984-August 1985, 50% to 75% of the

total XYZ positions held by A's customers were held on

margin; and that during the period September 1985-

December 1987, 25% to 50% of such XYZ positions were

held on margin.

c. After receiving one or more such monthly concentration

reports, Chaiken failed to take adequate steps to

ensure that the Firm's procedures were followed with

respect to the review of concentrated security

positions. For example, Chaiken failed to cause

Lovejoy to review customer accounts holding XYZ to

determine whether XYZ was suitable for the customers

and prepare a statement confirming the suitability of

XYZ for the customers.

d. After receiving one or more such monthly concentrationreports, Chaiken failed to take adequate steps to

prevent A's continued solicitation and recommendation

of purchases of XYZ.

e. Chaiken failed to take appropriate action to prevent

the unsuitable trading in XYZ which occurred in

customer accounts of A.

Pasadena Branch Office

47. During 1985-1986, B, a salesman in the Firm's branch

office in Pasadena, engaged in unsuitable options trading

in various customer accounts.

48. During 1985-1986, B recommended opening transactions in

options contracts for numerous customers who had limited

financial resources and virtually no prior experience

trading options. B recommended to such customers that

they participate in an options strategy which involved

primarily short-term uncovered option writing and

required the customers to authorize B to act with

discretionary power in their accounts.

49. The Firm's procedures required that "Discretionary

accounts must be the subject of frequent and appropriate

reviews by branch office managers. In reviewing

discretionary accounts it is the responsibility of thebranch office manager to ensure that transactions are not

excessive in size or frequency in view of the financial

resources and character of such accounts." Reviews

conducted to determine whether the trading was excessive

or unsuitable in discretionary accounts of B's customers

were inadequate.

50. During 1985-1986, active account reports for customer

accounts of B were prepared and distributed to various

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managers at the Firm, including Fuller and Evans, to

identify accounts with 10 or more trades or commissions

of $1,000 or more for the prior month. The active

account reports showed the number and dollar value of all

transactions, indicated the amount of commissions, and

attached a copy of the monthly statement for the account.





this report." Reviews conducted to determine whether the

options trading identified by such active account reports

was suitable for the customers of B were inadequate.

52. During 1985-1986, error reports for customer accounts of

B were prepared and distributed to various managers at

the Firm, including Fuller and Evans. The error reports

showed a large number of trade corrections and account

number changes for purchases of uncovered options

contracts in customer accounts of B.

53. During 1985-1986, the recommendation of purchases of

options contracts by B were unsuitable for various

customers, in view of their financial resources, prior

investment experience, and investment objectives.

54. During 1985-1986, the Firm permitted or failed to prevent

the solicitation and recommendation by B of opening

positions in options contracts which were unsuitable for

various customers.

55. During the period 1985-1986, B was the largest producer

in the Pasadena branch office and one of the largest

producers in the division.

56. On April 29, 1986, the Firm permitted B to resign.

57. Shortly thereafter, numerous customers of the Firm

complained to the Firm regarding the way B handled their

accounts, claiming that unsuitable options trading

occurred in their accounts.

58. As of April 1991, the Firm had received complaints from

52 customers of B regarding the options trading in their

accounts at the Pasadena branch office. As of April

1991, the Firm had paid a total of $1.5 million to

resolve 51 of the customer complaints.

Branch Office Manager for Pasadena

59. During 1985-1986, Fuller, the branch office manager for

the office in Pasadena, did not provide reasonable

supervision and control of the activity of B described

above, including:

a. B worked for the Firm during 1983-1984 and left in

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October 1984 to join another securities firm. In

January 1985, when B returned to the Firm as a

salesman at its branch office in Pasadena, Fuller was

aware that B had just been terminated by the other

securities firm because it was unwilling, in view of

its policy, to permit B to continue in an options

strategy which involved low-priced options.

b. Fuller received and reviewed on a daily basis order

tickets for transactions in the customer accounts of

B.

c. The Firm's procedures required that "Discretionary

accounts must be the subject of frequent and

appropriate reviews by branch office managers. In

reviewing discretionary accounts it is the

responsibility of the branch office manager to ensure

that transactions are not excessive in size or

frequency in view of the financial resources and

character of such accounts." Fuller failed to conduct

adequate reviews or take adequate steps to determinewhether the trading was excessive or unsuitable in

discretionary accounts of B's customers.

d. Fuller received and approved a large number of error

reports for trade corrections and requests for change

of account number for options transactions in customer

accounts of B.

e. Fuller received and reviewed active account reports

for customer accounts of B.

f. After receiving one or more such active account

reports, Fuller failed to take adequate steps to

review the activity in such customer accounts or

follow the Firm's procedures to determine whether such

trading was unsuitable or excessive for the customers.

g. During 1985-1986, on various occasions the Firm's

Senior Registered Options Principal, and Director of

Compliance, each inquired and expressed concerns to

Fuller about the options trading in the customer

accounts of B. For example, by memorandum dated

August 23, 1985, Compliance expressed concerns to

Fuller that B's strategy of selling uncovered options

was not appropriate for his customer accounts and that

such trading had generated excessive commissions for

B. Compliance advised Fuller of the need for closermonitoring of B's activities. Although he replied to

Compliance by memorandum dated October 3, 1985,

thereafter, Fuller failed to take adequate steps to

prevent B's solicitation and recommendation of

purchases and sales of options contracts which were

unsuitable and excessive.

h. Fuller failed to take appropriate action to prevent

the unsuitable and excessive trading in options which

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occurred in customer accounts of B.

Santa Barbara Branch Office

60. In January 1987, Customer H opened an account at the Firm

with C, a salesman in the Firm's branch office in Santa

Barbara. At that time, Customer H requested and received

approval from the Firm for a credit line of $1 million

for his account.

61. In connection with approving Customer H's request for a

$1 million credit line for his account, the Firm learned

that in 1975 customer H had been barred by the SEC from

association with any broker-dealer because he

participated in a fraudulent and manipulative stock

scheme, and that in 1979 Customer H had been convicted of

a felony for federal income tax violations.

62. In February 1987, Customer H began to purchase for his

account shares of UVW, a company engaged in oil and gas

exploration and oil field trucking business. Thereafter,Customer H accumulated on margin a large position in UVW,

which was the only security he purchased for his account.

By December 31, 1987, Customer H held 293,300 shares of

UVW in his account at the Firm, having a market value of

$1.7 million with a margin debit of more than $1 million.

63. During 1987, Customer H urged C to purchase and solicit

others to purchase UVW, and two other low-priced

speculative securities, RST, a company engaged in the

development of a process and technology to produce gold

from heavy, black or volcanic sand; and OPQ, a company

engaged in the business of salvaging platinum contained

in used catalytic converters. During 1987, the common

stock of UVW was listed on the NASDAQ and the common

stocks of RST and OPQ were quoted in the NASD pink

sheets.

64. During 1987, C solicited customers to purchase UVW, RST,

and OPQ.

65. By May 1987, C's customers held a concentrated position

in UVW. UVW traded during April-May 1987 in a price

range of $5 to $6 per share. In May 1987, a monthly

concentration report was prepared and distributed to

various managers at the Firm, including Stanger and

Evans, which showed that 22 customer accounts of C held

306,000 shares or 4.37% of the outstanding shares of UVW,and that Customer H's account held 233,300 shares. The

May 1987 concentration report also indicated that more

than 84% of all positions in UVW held by C's customers

were held on margin, with Customer H holding 227,000

shares on margin and 15 other customers holding an

additional 31,200 shares on margin.

66. In response to the May 1987 concentration report on UVW,

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each account holding UVW should have been reviewed in

accordance with the Firm's procedures to determine (a)

whether UVW was suitable for each customer, and (b)

whether the recommendation to purchase UVW for such

accounts was documented in a due diligence file for such

stock containing fundamental research material rather

than sales literature or information provided solely by

the issuer or Customer H.

67. Reviews for suitability of concentrated positions in UVW

conducted during 1987 were inadequate.

68. After May 1987, C continued to solicit and recommend

purchase transactions in UVW for customers on various

occasions when concentrated positions in UVW were already

held in existing customer accounts of C, that is,

positions of at least 5% of the outstanding shares.

69. The concentration of UVW in customer accounts of C

increased. The September 1987 concentration report

stated that 44 customer accounts of C held 355,670 sharesof UVW or more than 5% of the outstanding shares of UVW,

including 243,300 shares in Customer H's account. The

September 1987 concentration report also indicated that

more than 80% of all such positions in UVW held by C's

customers were held on margin, with Customer H holding

237,200 shares on margin and 18 other customers holding

an additional 46,500 shares on margin. During September

1987, UVW traded in a price range of $8 per share.

70. In or about September 1987, C requested the Firm to

become a market maker for UVW, RST, and OPQ and consider

a banking relationship with such companies. In a

memorandum dated September 4, 1987, distributed to senior

managers at the Firm, including Stanger and Evans, C

described Customer H as the "venture capitalist behind"

UVW, RST, and OPQ, and stated that Customer H "provides

the wherewithal in capital, contributes to the

management, and promotes the companies in a variety of

ways."

71. In October 1987, the Firm began to act as a market maker

in UVW. At that time, the Firm knew or should have known

that the businesses of UVW, RST, and OPQ were risky and

speculative; that Customer H, who was represented by C to

be the "venture capitalist" and promoter for such

companies, had been barred in 1975 by the SEC from

association with any broker-dealer because heparticipated in a fraudulent and manipulative stock

scheme, and had been convicted in 1979 of a felony for

federal income tax violations; that C and the Santa

Barbara branch office were relying entirely on Customer H

and the issuers for information about UVW, RST, and OPQ

without having conducted an independent investigation;

that the securities of UVW, RST and OPQ were not

registered for sale to residents of California; and that

C's customers held concentrated positions of UVW on

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margin which would be difficult to liquidate.

72. After October 1987, C continued to solicit and recommend

purchase transactions in UVW. The concentration of UVW

in customer accounts of C increased. The December 1987

concentration report stated that 81 customer accounts of

C held 446,711 shares or more than 6% of the outstanding

shares of UVW, including 293,300 shares in Customer H's

account. The December 1987 concentration report also

indicated that more than 83% of all such positions in UVW

held by C's customers were held on margin, with Customer

H holding 287,200 shares on margin and 12 other customers

holding an additional 43,100 shares on margin.

73. During 1987, C's solicitation and recommendation of

purchases of UVW, RST, and OPQ were unsuitable for

various customers in view of their financial resources,

prior investment experience, and investment objectives.

The purchases of UVW were also unsuitable in view of the

concentrated positions of UVW then held in customer

accounts at the Firm and the illiquid nature of suchpositions.

74. During 1987, the Firm permitted or failed to prevent the

solicitation and recommendation by C of purchases of UVW,

RST, and OPQ which were unsuitable for various customers.

75. During 1987, C was the largest producer in the Santa

Barbara branch office and one of the largest producers in

the Firm.

76. Numerous customers of the Firm complained to the Firm

regarding the way C handled their accounts during 1987,

claiming that unsuitable purchases of UVW, RST, and OPQ

were made in their accounts. By June 1988, the price of

UVW had fallen to less than $1 per share.

77. On October 20, 1988, the Firm terminated C's employment.

78. As of March 1991, the Firm had received complaints from

90 customers regarding the trading of UVW, RST, and OPQ

in their accounts at the Santa Barbara branch office. As

of March 1991, the Firm had paid a total of $1 million to

resolve customer complaints.

Branch Office Manager for Santa Barbara

79. During 1987, Stanger, the branch office manager for theoffice in Santa Barbara, did not provide reasonable

supervision and control of the activity of C described

above, including:

a. Stanger received monthly concentration reports during

1987 which showed that customer accounts of C held

concentrated positions in UVW and that 80% or more of

all such positions in UVW were held on margin.

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b. After receiving one or more such monthly concentration

reports, Stanger failed to follow the Firm's

procedures with respect to concentrated security

positions in that, among other things, he failed to

conduct adequate reviews of customer accounts holding

UVW or take adequate steps to determine whether UVW

was suitable for the customers and did not prepare a

statement confirming the suitability of UVW for such

customers.

c. After receiving one or more such monthly concentration

reports, Stanger failed to take adequate steps to

prevent C's continued solicitation and recommendation

of purchases of UVW.

d. Stanger failed to take appropriate action to prevent

the unsuitable trading in UVW which occurred in

customer accounts of C.

e. Stanger received and reviewed on a daily basis order

tickets for transactions in the customer accounts ofC.

f. Stanger failed to supervise C's activities in

soliciting and recommending to customers purchases of

securities promoted by Customer H, even though he

learned in January 1987 when Customer H opened his

account and was approved for a $1 million line of

credit that Customer H had been barred in 1975 by the

SEC from association with any broker-dealer.

g. Stanger learned in April 1987 that C had opened a

securities account away from the Firm without prior

approval and held a large position of UVW in that

account, but thereafter Stanger failed to follow the

Firm's procedures and Exchange Rule 407 with respect

to monitoring C's trading activities in such account.

Division Manager for Pasadena and Santa Barbara

80. During 1985-1987, Evans, the division manager for the

Firm's Southern Pacific Division, which included the

branch offices in Pasadena and Santa Barbara, did not

provide reasonable supervision and control of the

activity of B and C described above, including:

a. Evans received and reviewed active account reports

during 1985-1986 for customer accounts of B.

b. After receiving one or more such active account

reports, Evans failed to take adequate steps to ensure

that the Firm's procedures were followed with respect

to the review of active accounts. For example, Evans

failed to cause Fuller to review customer accounts of

B identified by active account reports to determine

whether such trading was suitable for the customers.

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c. During 1985-1986, on various occasions the Firm's

Senior Registered Options Principal, and Director of

Compliance, each inquired and expressed concerns to

Evans about the options trading in the customer

accounts of B. For example, by memorandum dated

August 23, 1985, Compliance expressed concerns to

Fuller with a copy to Evans that B's strategy of

selling uncovered options was not appropriate for his

customer accounts and that such trading had generated

excessive commissions for B. Compliance advised

Fuller and Evans of the need for closer monitoring of

B's activities. Although Fuller replied to Compliance

by memorandum dated October 3, 1985, with a copy to

Evans, thereafter, Evans failed to take adequate steps

to ensure that Fuller monitored B's activities to

prevent solicitation and recommendation of purchases

and sales of options contracts which were unsuitable

and excessive.

d. Evans failed to take appropriate action to prevent the

unsuitable trading in options which occurred incustomer accounts of B.

e. Evans received monthly concentration reports during

1987 which showed that customer accounts of C held

concentrated positions in UVW and that 80% or more of

all such positions in UVW were held on margin.

f. After receiving one or more such monthly concentration

reports, Evans failed to take adequate steps to ensure

that the Firm's procedures were followed with respect

to the review of concentrated security positions. For

example, Evans failed to cause Stanger to review

customer accounts holding UVW to determine whether UVW

was suitable for the customers and prepare a statement

confirming the suitability of UVW for the customers.

g. Evans failed to take appropriate action to prevent the

unsuitable trading in UVW which occurred in customer

accounts of C.

Boulder Branch Office

81. During the period October 1983-March 1986, D, a salesman

in the Firm's branch office in Boulder, engaged in

unsuitable and excessive trading in various customer

accounts.

82. In summary, D recommended and effected purchase

transactions on margin in five accounts for customers who

were retired, with limited financial resources and

conservative investment objectives, as follows:

Period Number Average Total Gross Margin

CustomerMonths Trades Equity Purchases Commissions Charges

I 23 170 $270,832 $5,282,800 $80,600 $32,215

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I 24 77 54,701 1,841,200 31,700 9,205

J 30 166 282,509 5,341,200 76,700 38,445

K 18 96 238,996 3,329,400 52,000 23,342

L 29 157 131,968 3,818,900 60,000 28,680

83. In July 1985, D began to solicit customers to purchase

the securities of LMN, a company engaged in the

development and sale of computer programs. The common

stock of LMN was listed on the Exchange. During July

1985, LMN traded in a price range of $25 to $27 per

share.

84. As of March 1986, the accounts of the five customers held

large positions of LMN which exceeded more than one half

of the total dollar value of their accounts. Four of the

customer accounts each held positions of 14,000 shares or

more of LMN. Purchases of such large positions of LMNwere not in accordance with the conservative investment

objectives indicated by the customers. For three of the

customers, the LMN positions in their accounts exceeded

95% of the total value of their accounts. In March 1986,

the five accounts had combined LMN positions of $769,250

out of a total combined value of $1 million. By the end

of March 1986, the price of LMN had fallen to $11 per

share.

85. During the period October 1983-March 1986, active account

reports were prepared and distributed to various managers

at the Firm, including McFerran, to identify those

accounts with 10 or more trades or commissions of $1,000

or more for the prior month. The active account reports

stated the number and dollar value of all transactions,

indicated the amount of commissions, and attached a copy

of the monthly statement for the account. During the

same period, monthly commission detail reports were

prepared and distributed at the Firm which showed for

each account all trading activity and commissions for the

prior month.





this report." Reviews conducted to determine whether thetrading in the accounts of the five customers listed

above was suitable for such customers were inadequate.

87. During the period October 1983-March 1986, active account

reports prepared and distributed at the Firm contained

information which disclosed that unsuitable and excessive

trading on margin was occurring during this period in the

five customer accounts.

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88. During October 1983-March 1986, D's solicitation and

recommendation of LMN and other securities were

unsuitable for the customers in view of their financial

resources, investment experience, and investment

objectives, and also in view of the large positions of

LMN then held in the customers' accounts at the Firm.

89. During October 1983-March 1986, the Firm permitted or

failed to prevent the solicitation and recommendation by

D of purchases of securities described above which were

unsuitable for such customers.

90. In March 1986, D became the manager of another branch

office of the Firm and his customer accounts were

transferred to that office.

91. Four customers of the Firm complained to the Firm

regarding the way D handled their accounts during 1983-

1986, claiming that unsuitable and excessive purchases

were made in their accounts.

92. On August 19, 1988, the Firm terminated D's employment.

93. As of March 1991, the Firm had paid $350,000 to resolve

complaints from four customers regarding the unsuitable

and excessive trading in their accounts at the Boulder

branch office.

Branch Office Manager for Boulder

94. During the period October 1983-March 1986, McFerran, the

branch office manager for the office in Boulder, did not


activity of D described above, including:

a. McFerran was aware of the age, retired status, limited

financial resources, and conservative investment

objectives of the five customers listed above.

b. McFerran received and reviewed on a daily basis order

tickets for transactions in the accounts of D's

customers.

c. McFerran received and reviewed active account reports

for the customers of D.

d. After receiving one or more such active account

reports, McFerran failed to conduct adequate reviewsof the activity in such customer accounts or follow

the Firm's procedures to determine whether such

trading was authorized and suitable for the customers.

e. McFerran failed to take appropriate action to prevent

the unsuitable and excessive trading which occurred

during two years in customer accounts of D.

Louisville Branch Office

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95. During 1985-1987, F, a salesman in the Firm's branch

office in Louisville, violated margin requirements in his

personal accounts at the Firm and engaged in conduct

inconsistent with just and equitable principles of trade.

96. During 1985-1986, F engaged in a practice in his personal

accounts at the Firm of purchasing options without

sufficient equity to cover the purchases and paying for

the purchases with the proceeds of the sales of the same

options contracts.

97. During 1986, on numerous occasions F issued checks drawn

on his personal accounts at the Firm which F knew or

should have known were drawn upon insufficient and/or

encumbered funds. The checks generated "Bounced Check

Alerts" at the Firm which indicated that there were not

sufficient available funds to cover the checks issued

by F.

98. During March-May 1986, the Firm's Compliance and CreditControl departments recommended that certain limits and

conditions be imposed on F's accounts as a result of the

foregoing activities. Davis chose not to implement such

limits or conditions.

99. Thereafter, F continued during 1986-1987 to purchase and

sell options using the proceeds of such sales to pay for

the purchases when his account lacked sufficient equity

to cover the purchases, and to issue checks against his

personal accounts at the Firm which were drawn upon

insufficient and/or encumbered funds.

100. During 1986, on various occasions F traded the same

options on the same day as his customers and received

more favorable execution prices than his customers.

101. During 1986, on several occasions F entered orders to

trade options without designating a customer's account

and thereafter F assigned such trades which resulted in

more favorable execution prices to his personal account

and the trades with less favorable prices to his

customers.

102. Four customers of the Firm complained to the Firm

regarding the way F handled their accounts during 1986-

1987, claiming that unauthorized and unsuitable trading

occurred in their accounts.

103. On August 10, 1987, the Firm terminated F's employment.

Branch Office Manager for Louisville

104. During 1985-1987, Davis, the branch office manager for

the office in Louisville, did not provide reasonable

supervision and control of the activity of F described

above, including:

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a. During 1985, Davis was advised that F engaged in a

practice in his personal account of purchasing options

without sufficient equity to cover the purchases and

paying for the purchases with the proceeds of the

sales of the same options contracts.

b. During 1986, on several occasions the Firm's Senior

Registered Options Principal, and Credit Control

Department, notified Davis by wire that F had issued

checks drawn on his personal account at the Firm which

were drawn upon insufficient and/or encumbered funds,

and recommended that certain limits and conditions be

imposed on F's accounts. Davis chose not to implement

such limits or conditions.

c. Thereafter, Davis failed to take adequate steps to

prevent F from continuing to purchase and sell options

using the proceeds of such sales to pay for the

purchases when his account lacked sufficient equity to

cover the purchases, and to issue checks against hispersonal account at the Firm which were drawn upon

insufficient and/or encumbered funds.

d. Davis received and reviewed on a daily basis order

tickets for transactions in the customer and personal

accounts of F.

As part of his daily review of order tickets, Davis

was obliged by the Firm's procedures to direct his

review to possible conflicts of interest to determine

if transactions in a salesman's account were executed

at better prices than customer orders in the same

security on the same day.

f. Davis failed to detect and take adequate steps to

prevent F from trading the same options as his

customers on the same day and receiving more favorable

prices than his customers.

g. During 1986, Davis also received and reviewed on

several occasions allocation notices from the Firm's

Block Desk which showed that F had entered orders to

trade options without designating a customer's account

and such orders had been executed "open customer."

Under Exchange Rule 410 and the Firm's procedures, the

customer account designation was required on all order

tickets before the orders were entered for execution.

h. Davis failed to take adequate steps to prevent F from

entering orders without first designating customer

accounts on such order tickets.

i. Davis failed to take appropriate steps to provide

reasonable supervision of F with a view to preventing

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111. During 1986, Webster, the branch office manager for the

office in Fairfield, did not provide reasonable

supervision and control of the activity of G described

above, including:

a. In March 1986, the Firm's Senior Registered Options

Principal advised Webster by memorandum dated March 6,

1986 that a recent review of the option accounts

serviced by G had disclosed a large number of

deficiencies. The memorandum listed, among other

things, free riding violations, extensions,

liquidations, bounced checks, violation reports filed,

trading without final New York options approval, and

purchasing short term options without funds on

deposit. The memorandum recommended that certain

limits and conditions be imposed on option accounts

serviced by G. Webster failed to take adequate steps

to impose such limits or conditions.

b. In April 1986, G opened an account in his wife's name

and a joint account with his wife. Thereafter, duringthe period May-December 1986, numerous margin

violations occurred in both accounts when G purchased

options without funds on deposit, used proceeds from

sales to pay for purchases, and engaged in a practice

of liquidating positions to meet open calls.

c. During 1986, on numerous occasions G issued checks

drawn on his personal account at the Firm which

generated "Bounced Check Alerts" at the Firm

indicating that there were not sufficient available

funds to cover the checks. In many instances, Webster

approved an override to honor the checks based on G

liquidating various positions, receiving cash

advances, or transferring funds from other personal

accounts to cover the checks.

d. During 1986, Webster failed to take adequate steps to

prevent the margin violations by G in his customer and

personal accounts.

e. Webster failed to take appropriate steps to provide

reasonable supervision of G with a view to preventing

the foregoing violations by G.

New Haven Branch Office

112. During the period July 1985-April 1988, E, a registeredrepresentative in the New Haven branch office,

misappropriated 18 checks in a total amount of $400,000

from 12 customers. The Firm has reimbursed the customers

for the stolen funds plus interest.

113. E used two methods to misappropriate customer checks. On

five occasions, E requested checks be mailed to

customers. In each instance, the customer had not

requested the check. When the customers received the

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activity of E described above, including:

a. Contrary to Firm procedures, Dest approved routinely

E's requests for hand delivery by him of checks to

customers without inquiring or determining whether

extraordinary circumstances existed for such delivery.

b. Contrary to Firm procedures, Dest failed to ensure

that all checks received by E for hand delivery to

customers were entered on the branch office check

log.

c. Contrary to Firm procedures, Dest failed to maintain

at the branch office copies of all letters sent to and

received from customers confirming their receipt of

checks received by E for hand delivery to them.

d. Dest failed to take adequate steps to ascertain that

each customer had in fact received the check given toE for hand delivery to each such customer.

e. Dest failed to take appropriate steps to provide

reasonable supervision of E with a view to preventing

the foregoing violations by E.

Springfield Branch Office

121. During the period August 1985-October 1986, M, a

registered representative in the Springfield branch

office, and N, M's sales assistant, misappropriated

numerous checks in a total amount of $1.3 million from 39

customers. The Firm has reimbursed the customers for the

stolen funds plus interest.

122. During the period August 1985-October 1986, on numerous

occasions M or N requested checks be issued to customers

and picked them up from the branch office cashier

allegedly for delivery to the customers. In each

instance, the customer had not requested the check and

was not alerted to the alleged delivery by M or N.

Thereafter, M or N deposited such checks into their

personal bank accounts.

123. During this period, under the Firm's procedures the

delivery of checks to customers by registered

representatives was permitted only under extraordinarycircumstances and only with the prior written approval of

the branch office manager.

124. The Firm's procedures also required that the branch

office receive from the customer a letter acknowledging

that the check was received. A copy of the customer's

confirming letter was to be retained at the branch

office. The registered representative delivering the

check was required to sign a check log book acknowledging

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receipt of the customer check, which was maintained in

the operations area at the branch office. The branch

office manager was required to review the log each month.

125. For the period August 1985-October 1986, the Firm could

not locate the branch office check log for the

Springfield branch office or any letters from customers

confirming that they had received the checks issued for

hand delivery. The branch office had no records with

respect to the issuance of checks for hand delivery to

customers.

126. During 1986, the Firm's Senior Registered Options

Principal notified the Branch Office Manager for

Springfield by wire that he had reviewed accounts

serviced by M and found more than 100 deficiencies for

the period November 1985-February 1986. The memorandum

listed, among other things, free-riding violations,

extensions, liquidations, bounced checks, violation

reports filed, trading without final New York options

approval, and purchasing short term options without fundson deposit. The memorandum recommended that certain

limits and conditions be imposed on option accounts

serviced by M, but no such limits or conditions were ever

imposed.

127. Thereafter, during the period May-October 1986, numerous

margin violations occurred in option accounts serviced by

M and N.

128. On November 6, 1986, the Firm terminated M's and N's

employment.

129. The March 6, 1986 memorandum was also sent to the

Division Manager for the Springfield branch office and

the Regional Compliance Administrator. Shortly

thereafter, in April 1986, the Regional Compliance

Administrator requested that the Firm conduct an internal

audit of Springfield. A year later, in May 1987, an

internal audit of Springfield was done for the first time

since 1984.

Failure to Comply With Margin Requirements

130. During 1984-1987, violations of margin requirements and

Regulation T occurred at various branch offices,

including Philadelphia, Pasadena, Louisville, Fairfield,

Springfield, Boston, and San Francisco.

131. During 1984-1987, the Firm failed to comply with Exchange

Rule 431(f)(7) in that on numerous occasions it permitted

customers in various branch offices to make a practice of

either deferring the deposit of cash or securities beyond

the time when such transactions would ordinarily be

settled or cleared, or meeting the margin required by the

liquidation of the same or other commitments in the

account.

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Rule 431(f)(8) and Section 220.8(b) of Regulation T in

that on numerous occasions it permitted or failed to

cancel or otherwise liquidate transactions or obtain

extensions in customer accounts at various branch offices

when the equity in such accounts was not sufficient to

meet initial and maintenance margin requirements or when

a customer did not make full cash payment within the

required time.


Rule 431(f)(9) and Section 220.8(c) of Regulation T in

that on numerous occasions it permitted customers at

various branch offices to make a practice of effecting

transactions in customer cash accounts where the cost of

the securities purchased was met by the sale of the same

securities, and failed to restrict such accounts for 90

days.

134. During 1984-1987, the Firm failed to comply with Section220.8 of Regulation T of the Board of Governors of the

Federal Reserve System in that on numerous occasions it

failed to cancel promptly purchase transactions in

customer cash accounts which were on a 90 day

restriction.

Failure to Report Events Timely to the Exchange

135. Exchange Rule 351 requires that a member organization

report promptly to the Exchange certain events.

136. During the period January 1987 through December 1990, the

Firm failed to make timely filings with the Exchange for

at least 175 events required to be reported under

Exchange Rule 351 relating to the disposition of customer

complaints.

137. The Firm reported at least 175 events to the Exchange

late, from approximately two months to two years or more

after the reportable event dates as follows:

Filed Late Number of Events

2-5 months 72

6-11 months 48

1-2 years 44

2 or more years 11Total 175

138. During the period January 1987-December 1990, the Firm

reported more than one year late numerous dispositions of

customer complaints in excess of $100,000. For example,

the Firm reported in July 1990, that is, 26 months late,

that a customer had obtained an award in April 1988 for

$399,000; the Firm reported in April 1989, that is, 24

months late, that it had settled a customer complaint in

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March 1987 for $350,000.

139. In addition to the late reporting described above, the

Firm failed to make any filings with respect to the

existence or disposition of numerous customer complaints

at various branch offices. For example, the Firm did not

make filings for virtually all settlements of customer

complaints relating to C in the Santa Barbara branch

office described above.

140. During 1989 and 1990, the Firm failed to amend prior Form

U-5 filings for terminated employees to disclose customer

complaints and/or settlements which occurred at or about

the time of termination or thereafter.

141. The Firm's failure during 1987-1990 to report timely to

the Exchange events relating to the existence or

disposition of customer complaints delayed the Exchange's

review of such matters and hindered the Exchange in

performing its regulatory obligations under the federal

securities laws with respect to the investigation andprosecution of sales practice and other violations.

The Firm's Lack of Adequate Supervision and Control

142. During the period 1985-1988, the Firm failed to comply

with Exchange Rule 342(a) and (b) in that it failed to

conduct supervisory inspections of certain branch offices

at least annually as required by Exchange Interpretation

Handbook, Rule 342(a) and (b) (03):

a. As of September 1985, 42 of the Firm's branch offices

were not visited during the prior 18 months; 8 branch

offices were not visited during the prior 25 months;

and 14 branch offices had never been visited in

accordance with the Exchange's requirement for annual

branch office visits;

b. As of February 1986-1987, 136 of the Firm's branch

offices were not visited during the prior 18 months in

accordance with the Exchange's requirement for annual

branch office visits; and four branch offices,

including Fairfield and Springfield, had not been

visited for periods ranging from 28 to 44 months;

c. As of February 1988, 41 of the Firm's branch offices

were not visited during the prior 14 months in

accordance with the Exchange's requirement for annualbranch office visits; and

d. The sales practice examination reports for the period

1985-1988 notified the Firm of its foregoing violation

of Exchange Rule 342 in failing to conduct annual

supervisory inspections of certain branch offices.

143. During the period 1984-1988, the Firm violated Exchange

Rule 342(a) and (b) in that it failed to maintain written

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tables of supervision identifying the person with overall

responsibility for internal supervision and control of

the Firm and compliance with securities laws and

regulations, as well as identifying the supervisory

responsibility for each area of the Firm's business

activities:

a. The Firm failed to delineate supervisory authority to

enforce trading restrictions.

b. The Compliance and Margin Departments viewed their

functions as solely advisory, and notified the branch

offices when accounts traded in violation of

restrictions. However, on numerous occasions branch

offices did not take adequate steps to enforce

restrictions prior to the execution of violative

orders. The Firm failed to clarify for Compliance,

Margin, Division and Branch Office Managers what

responsibility each had for enforcing trading

restrictions. As a result of the Firm's failure to

delineate this responsibility, accounts traded throughrestrictions.

144. During the period 1984-1988, the Firm failed to provide

for, establish, and maintain appropriate procedures of

supervision and control, including a separate system of

follow-up and review, with respect to its sales practice

activities designed to prevent the foregoing violations,

including:

a. the implementation of compliance department

directives, interpretations and advice;

b. the enforcement of trading restrictions;

c. the prevention of violations of Regulation T in

customer and employee accounts;

d. the review of active customer accounts for excessive

and/or unsuitable trading;

e. monitoring of trading by employees in their personal

accounts;

f. ensuring that before orders were executed, the name or

customer's account were designated on the order

tickets for such orders;

g. monitoring sales activities of registered

representatives to prevent their making sales of

securities in states where the salesmen were not

licensed or the securities were not registered;

h. ensuring that procedures for delivery of checks to

customers by registered representatives were followed;

and

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ensuring that deficiencies with respect to sales

practice activities noted by the Exchange's sales

practice examination reports and by the Firm's own

internal reviews were corrected.

145. The Exchange's sales practice examination reports for the

period 1985-1988 brought to the attention of the Firm the

existence of recurring sales practice deficiencies in a

number of branch offices. The Firm failed to take steps

to adopt or enforce existing procedures designed to

prevent such deficiencies.

146. The Firm has informed the Division, and the Division has

considered, the following circumstances relating to the

matters covered in the Stipulation and Consent:

Beginning in 1986 and continuing over the period of

time subsequent to receipt of the Exchange's

examination reports which were critical of the Firm's

sales practice systems and procedures, the Firm hasmade major investments of time, money and other

resources resulting in significant improvements to its

supervisory systems, including:

a. The reorganization and substantial budgetary increases

of the Firm's compliance department;

b. The revamping of the surveillance methods,

particularly computer systems and exception reports;

c. Significant improvements to the department carrying

out the internal audit function, including budgetary

increases, personnel increases and the implementation

of essential computer systems needed to enhance

auditing procedures which, according to the Firm,

resulted in annual inspections of virtually all retail

branch offices in 1989 and 1990;

d. The implementation of new computer systems designed to

strengthen the Firm's ability to monitor risk, enforce

margin requirements and generally supervise activity

in the accounts of public customers;

e. The commission of a study by an independent accounting

firm in 1987 to review the Firm's sales practices,

particularly with respect to the adequacy of

procedures;

f. The publication of new procedure manuals in 1988 and

1989 and the redevelopment of training programs; and

g. The development of other data base systems to enhance

the accuracy and availability of information available

to the Firm's supervisors.

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Furthermore, the Chief Executive Officer of the Firm

has directed that a review shall be performed under the

overall supervision of the General Counsel of the Firm,

to evaluate whether further improvements to sales

practices policies and procedures are appropriate. A

written report of that review and any resulting

recommendations will be submitted to the Audit

Committee of the Board of Directors of the Firm's

parent corporation. The Audit Committee may adopt and

implement any such recommendations as it deems

appropriate.

DECISION

The Hearing Panel, in accepting the Stipulation of Facts and

Consent to Penalty, found the Firm and Messrs. Lovejoy, Chaiken,

Fuller, Stanger, Evans, McFerran, Dest, Davis and Webster guilty

as set forth above by unanimous vote.

PENALTY

In view of the above findings, the Hearing Panel, by unanimous

vote, imposed the penalty consented to by the Firm of a censure;

fines totalling $900,000 consisting of (a) a fine assessed

against the Firm in the amount of $800,000, and (b) a

contribution of $100,000 toward fines imposed upon the present

and former supervisory personnel as set forth below; and that the

Firm shall complete the review, described in paragraph 146 above,

that has been directed by the Chief Executive Officer of the Firm

under the overall supervision of the General Counsel of the Firm,

to evaluate whether further improvements to sales practices

policies and procedures are appropriate at this time. A written

report of that review and any resulting recommendations will be

submitted to the Audit Committee of the Board of Directors of the

Firm's parent corporation. The Audit Committee may adopt and

implement any such recommendations as it deems appropriate. The

Firm further shall implement all recommendations of the Audit

Committee resulting from the aforementioned report, and submit a

copy of such report, Audit Committee recommendations, and a

written representation to the Division that all recommendations

have been implemented, within six months from the date this

decision of the Hearing Panel accepting this Stipulation and

Consent becomes final.


vote, imposed the penalty consented to by Mr. Lovejoy of a

censure; a fine of $15,000; and a suspension from membership,

allied membership, approved person status and employment orassociation with a member or member organization in a supervisory

capacity for a period of three weeks.


vote, imposed the penalty consented to by Mr. Chaiken of a


allied membership, approved person status and employment or

association with a member or member organization in a supervisory

capacity for a period of two weeks.

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vote, imposed the penalty consented to by Mr. Fuller of a






vote, imposed the penalty consented to by Mr. Stanger of a






vote, imposed the penalty consented to by Mr. Evans of a censure;

a fine of $10,000; and a suspension from membership, allied

membership, approved person status and employment or association

with a member or member organization in a supervisory capacity

for a period of two weeks.


vote, imposed the penalty consented to by Mr. McFerran of a




capacity for a period of two weeks.


vote, imposed the penalty consented to by Mr. Dest of a censure;




for a period of two weeks.


vote, imposed the penalty consented to by Mr. Davis of a censure;




for a period of one week.


vote, imposed the penalty consented to by Mr. Webster of a



association with a member or member organization in a supervisorycapacity for a period of one week.

For the Hearing Panel

Milton M. Stein

Hearing Officer

91-192-201

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