UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 41309 / April 19, 1999 Administrative Proceeding File No. 3-9876 ______________________________ ORDER INSTITUTING : ADMINISTRATIVE PROCEEDINGS In the Matter of : PURSUANT TO SECTIONS 15(b) : AND 19(h) OF THE SECURITIES Robert Grady, : EXCHANGE ACT OF 1934, Respondent. : MAKING FINDINGS, AND IMPOSING : REMEDIAL SANCTIONS : : ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that administrative proceedings pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") be instituted against respondent Robert Grady ("Grady"). II. In anticipation of the institution of these proceedings, Grady has submitted an Offer of Settlement ("Offer"), which the Commission has determined is in the public interest to accept. Solely for the purpose of this proceeding, and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings set forth herein, except as to paragraph III.A.1. below, which Grady admits, and the jurisdiction of the Commission over him and over the matters set forth in this Order Instituting Administrative Proceedings Pursuant To Sections 15(b) And 19(h) Of The Securities Exchange Act Of 1934, Making Findings, And Imposing Remedial Sanctions ("Order"), which Grady also admits, Grady consents to the entry of the findings and the imposition of the sanctions set forth below. Accordingly, IT IS ORDERED that administrative proceedings pursuant to Sections 15(b) and 19(h)of the Exchange Act be, and hereby are, instituted. III. On the basis of this Order and Grady's Offer, the Commission makes the following findings: A. THE RESPONDENT Grady, age 65, was a principal and fifty percent owner of Grady & Hatch & Co., Inc. ("Grady & Hatch") from June 1983 until June 1997. In June 1997, Grady and the other fifty percent owner sold a controlling interest in Grady & Hatch to three individuals not affiliated with Grady & Hatch during the relevant period. Grady continues to be associated with the firm. Grady & Hatch, which is located in New York City, has been registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act from June 1983 until the present. B. SUMMARY 1. This matter arises from Grady's failure reasonably to supervise a trader at Grady & Hatch with a view to preventing violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. From May 5 through at least July 20, 1993, the trader manipulated the price of RMS Titanic stock from $5.00 to $11.50 on minimal trading volume or public interest. The trader (a) set the initial price based solely upon the directions of a major shareholder and promoter of RMS Titanic; (b) raised the price of RMS Titanic stock without any market basis for doing so; and (c) effected trades with the understanding that other participants in the scheme would protect him from risk of loss by buying any long position or covering any short position the trader held. Throughout this period, RMS Titanic reported no significant corporate developments that would have justified the rise in its stock price. 2. Grady was the trader's supervisor during the period at issue. Grady failed reasonably to supervise the trader by failing to review his trading in RMS Titanic stock and question the trader about why he had exceeded his authorized trading limit. As a result of Grady's failure to follow the supervisory procedures he had established, the violations by the trader were not prevented or detected. C. THE TRADER'S VIOLATIONS 1. From May 5 through June 4, 1993, Grady & Hatch was the sole market-maker in RMS Titanic stock. At the direction of a major shareholder and promoter of RMS Titanic, and without conducting any independent determination as to whether the price was appropriate, the trader set the initial market price of RMS Titanic stock at $5.00 per share. The trader then increased the bid price for RMS Titanic stock thirteen times in four weeks, gradually raising the bid price from $5.00 to $8.50. Of the retail sales volume during this period, 96% came from accounts controlled by the major shareholder and promoter of RMS Titanic. Neither the public market demand nor RMS Titanic's corporate developments justified the trader's increasing the price. 2. From June 4 through July 20, 1993, other broker-dealers became market-makers in RMS Titanic stock. The trader increased his bid price from $8.50 to $11.50, creating the appearance of increased market demand. From June 4 through July 20, 1993, the trader was the high bidder or one of the high bidders on thirty- one of the thirty-two days, and was the sole high bidder on thirteen of the days. The bid price for RMS Titanic stock remained above $8.00 per share until July 20, 1993. 3. On several days during the manipulation period, the trader held large long positions in RMS Titanic stock that far exceeded his authorized trading limit. He accumulated these positions with the understanding that other participants in the scheme would protect him from any substantial losses. The trader never disclosed this understanding to his retail customers. Throughout the course of the manipulation scheme, the other participants in the scheme purchased RMS Titanic stock themselves and compensated brokers to generate the demand necessary to protect the trader and enable him to set and maintain an artificially high price for the stock. 4. Grady & Hatch realized $23,000 in trading profits from trading RMS Titanic stock. Of this amount, Grady received $3,447. D. GRADY'S FAILURE TO SUPERVISE 1. During the relevant period, Grady was responsible for supervising the trader at Grady & Hatch and for insuring that Grady & Hatch complied with trading rules and the federal securities laws. 2. Grady's supervision of the trader was limited to undertaking to examine the trader's trading sheets on a daily basis. As a general matter, however, because of the trader's experience and Grady's confidence in the trader's abilities, Grady gave him a free hand in running the trading account and questioned the trader about his trading positions infrequently. Even though Grady instructed the trader to limit himself to a total trading position of $50,000 (or, in some instances, $100,000), the trader occasionally held long positions in excess of $300,000 in RMS Titanic securities. Grady failed to review the trader's trading activity daily and thus failed to note that the trader had exceeded his authorized trading position or question the trader about why he had exceeded his authorized position. 3. During the period at issue, Grady often was out of the office on other matters. During Grady's absences, Grady & Hatch did not have any procedure for others to supervise Grady & Hatch's trader. E. LEGAL ANALYSIS 1. Grady's Duty To Supervise The Trader At Grady & Hatch Section 15(b)(6) of the Exchange Act authorizes the Commission to impose sanctions against a person associated with a broker-dealer if that person has "failed reasonably to supervise, with a view to preventing violations [of the federal securities laws], another person who commits such a violation, if such person is subject to his supervision" within the meaning of Section 15(b)(4)(E) of the Exchange Act. As the Commission has explained, "[t]he president of a corporate broker-dealer is responsible for compliance with all of the requirements imposed on his firm unless and until he reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person's performance is deficient." In re Consolidated Investment Services, Exchange Act Release No. 36687, 61 SEC Docket 20, 31 (Jan. 5, 1996) (hereinafter, "CIS") (quoting Thomas F. White, 51 S.E.C. 1194, 1197 (1994)). 2. Grady Failed Reasonably To Supervise The Trader At Grady & Hatch a. The test for failure to supervise is whether the "supervision was reasonably designed to prevent the violations at issue." In re O'Neal, Exchange Act Release No. 34116, 56 SEC Docket 2447, 2456 (May 26, 1994). Supervisors have an obligation to respond "vigorously" and "with the utmost vigilance" to "any indication of irregularity." CIS, 61 SEC Docket at 29; In re Kantor, Exchange Act Release No. 34-32341, 54 SEC Docket 293, 301 (May 20, 1993). A supervisor cannot ignore or disregard "red flags" or "suggestions of irregularities," but rather must "act decisively to detect and prevent" improper activity. Kantor, 54 SEC Docket at 301-02; In re Vieira, Exchange Act Release No. 26576, 42 SEC Docket 1815, 1821 (Feb. 28, 1989). Indications of possible wrongdoing "demand inquiry as well as adequate follow-up and review." Kantor, 54 SEC Docket at 301. b. Grady was the chief executive and compliance officer of Grady & Hatch and was directly responsible for the supervision of Grady & Hatch's trader. Grady failed to examine the trader's trading sheets on a regular basis and therefore failed to recognize that the trader had exceeded his authorized trading limit. Notwithstanding the trader's years of experience or the confidence that Grady had in him, as the trader's supervisor, Grady could not simply rely upon the trader's years of experience in the securities industry or his confidence in his abilities as a trader to discharge his supervisory responsibilities. At a minimum, to discharge his responsibilities for ensuring the trader's compliance with the federal securities laws, Grady should have questioned the trader specifically about why he was exceeding his authorized trading limit. Having been alerted by this "red flag" to the possibility of improper conduct, Grady also should have questioned the trader about his trading activity in RMS Titanic generally. By failing to act, Grady failed reasonably to supervise Grady & Hatch's trader with a view to preventing him from manipulating the prices of the securities for which Grady & Hatch acted as market-maker. c. As a result of the foregoing, Grady failed reasonably to supervise Grady & Hatch's trader, who was subject to his supervision, with a view to preventing the trader's violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, within the meaning of Section 15(b)(4)(E) of the Exchange Act, during the period May 5 through July 20, 1993, by: (i) failing to take action to monitor on an ongoing basis Grady & Hatch's trader's trading activity and positions in RMS Titanic securities; and (ii) failing to take action to monitor whether the trader at Grady & Hatch had exceeded his authorized trading position or to question the trader at Grady & Hatch about why he had exceeded his authorized limit. IV. Based on the foregoing, the Commission finds that: Grady failed reasonably to supervise Grady & Hatch's trader, an individual subject to Grady's supervision, with a view to preventing the trader's violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. V. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept Grady's Offer and to impose the sanctions which are set forth in his Offer. Accordingly, IT IS HEREBY ORDERED that: A. Effective on the second Monday following the entry of this Order, Grady be, and hereby is, suspended from association with any broker or dealer for a period of one month; B. Effective immediately following the period of his suspension from association, Grady be, and hereby is, suspended from association in a supervisory capacity with any broker or dealer for a period of nine months. C. Grady shall provide to the Commission, within fourteen days after each of the end of the (i) one month suspension from association with any broker or dealer; and (ii) nine month suspension from association in a supervisory capacity with any broker or dealer described above, an affidavit that he has complied fully with the sanctions described in Sections V.A. and B. above. The affidavit should be transmitted to Carmen J. Lawrence, Esq., Regional Director, Securities and Exchange Commission, 7 World Trade Center, New York, N.Y. 10048, Attn: Theresa M. Ward, Esq. D. Pursuant to Section 21B of the Exchange Act, Grady shall, within ten days after the entry of this Order, pay disgorgement of $3,447 plus $1,668.61 in prejudgment interest thereon, for a total of $5,115.61, with payment to be made to the United States Treasury ("Treasury") in the manner described in Paragraph V.E below; E. Pursuant to Section 21B of the Exchange Act, Grady shall, within ten days after the date of entry of this Order, pay a civil money penalty in the amount of $5,000 to the Treasury. Such payment shall be made to the Treasury by postal money order, certified check, bank cashier's check or bank money order, payable to the order of the United States Securities and Exchange Commission. The payments shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under the cover of letter identifying the name and administrative proceeding file number of this proceeding. A copy of the cover letter and payment shall be simultaneously transmitted to Carmen J. Lawrence, Esq., Regional Director, Securities and Exchange Commission, 7 World Trade Center, New York, N.Y. 10048, Attn: Theresa M. Ward, Esq. By the Commission. Jonathan G. Katz Secretary