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SECURITIES AND EXCHANGE COMMISSION
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In the Matter of the Application of GUANG LU For Review of Disciplinary Action Taken by NASD |
Failure to Give Notice to Member and Executing Firm
Failure to Obtain Written Authorization Before Discretionary Trading
False Answer on Form U-4
Alleged Unsuitable Transactions
Registered representative of member firm of registered securities association (i) exercised discretion in a customer's account not maintained by his employer member and failed to notify his employer and the executing member firm in writing of his trading; (ii) failed to obtain written authorization from a discretionary account customer; and (iii) provided a false answer on his Form U-4. Held, association's findings of violations and the sanctions it imposed are sustained in part.
Guang Lu, pro se.
Marc Menchel, Alan B. Lawhead, Carla J. Carloni, and Jennifer C. Brooks, for NASD.
Appeal filed: June 15, 2004
Last brief received: November 5, 2004
Guang Lu appeals from NASD disciplinary action. At the time of the events in question, Lu was registered as a general securities representative and investment company and variable contract products representative of member firm New York Life Securities, Inc. ("NYLIFE"). NASD found that Lu: (1) exercised discretionary authority in trading an account maintained by member firm Charles Schwab and Co. Inc. ("Schwab") while he was a registered representative with NYLIFE without giving prior written notice to Schwab and NYLIFE, in violation of NASD Conduct Rules 3050(c) and 2110;1 (2) exercised discretionary authority in a customer's account without prior written authorization from both the customer and NYLIFE, in violation of NASD Conduct Rules 2110 and 2510(b);2 (3) provided false information on his Form U-4 in violation of NASD Conduct Rule 2110 and Membership Rule IM-1000-1;3 and (4) made unsuitable trades in a customer's accounts, in violation of NASD Conduct Rules 2110 and 2860(b).4 NASD barred Lu for violating Conduct Rule 3050, barred him further for providing false information on his Form U-4, and additionally barred him for exercising discretion without written authority and unsuitable trading.5 We base our findings on an independent review of the record.
In March 1998, Lu joined New York Life Insurance Company ("New York Life"). In 1999, Lu became registered with NYLIFE, New York Life's subsidiary, as a general securities representative.
On February 15, 2000, Lu met Dr. Xuejiao Hu, a fellow immigrant from Beijing, China, at a lecture that Lu gave on options trading.6 [893][922][677] Lu held himself out as an options expert. After the lecture, Dr. Hu approached Lu for help with her investments. Although Dr. Hu had not traded options before, she asked Lu to trade options for her in order to recoup the trading losses that she previously had incurred in her Schwab brokerage account. Dr. Hu offered to pay Lu a commission for any profits he made for her, but Lu insisted on helping her without compensation. Dr. Hu then gave Lu the online password to her Schwab account.
At the time, Dr. Hu's Schwab brokerage account was worth approximately $166,000. Before the Hearing Panel, Dr. Hu testified that, when she opened her Schwab account, she had an annual income of $50,000 from her previous job, owned a Vanguard mutual fund account worth about $30,000, and owned two houses as investment property.
Between March 3, 2000 and March 16, 2000, Lu made twenty-six options purchases in Dr. Hu's online Schwab account. Sixteen of the twenty-six options that Lu purchased for Dr. Hu's Schwab account expired worthless. By the end of March 2000, Dr. Hu's Schwab account had lost over $70,000 of its value, declining from approximately $166,000 to $93,000. In April 2000, Dr. Hu changed her Schwab account password to block Lu's access to the account.
Before the Hearing Panel, Lu admitted that he traded options in Dr. Hu's Schwab account while he was a registered representative with NYLIFE. Lu testified that, when he tried to convince Dr. Hu to trade options on her own, she insisted he do the trading. When the Hearing Panel asked Lu whether he "[u]ltimately agreed to do . . . options trading in [Dr. Hu's] Schwab account," he replied "[c]orrect." When the Hearing Panel asked Lu whether he had notified either Schwab or NYLIFE that he was trading Dr. Hu's Schwab account, he responded "[n]o." When the Hearing Panel asked Lu if he was "making the decisions of which options to buy and which options to sell" in Dr. Hu's Schwab account, Lu replied, "[c]orrect."
Around the same time that Lu began trading Dr. Hu's Schwab brokerage account, Dr. Hu submitted paperwork to open a brokerage account at NYLIFE.7 [902] On her NYLIFE application forms, Dr. Hu claimed, among other things, annual income of $50,000, net worth of $200,000, an estimated tax bracket of "[o]ver 28%," and two years of options trading experience. [1099][710]8
On March 3, 2000, while the Schwab account was open, Dr. Hu opened her NYLIFE brokerage account with a $500 check, and on April 6, 2000, transferred to the account Vanguard mutual fund shares worth over $15,000. Around the time that she blocked Lu's access to her Schwab account, Dr. Hu gave Lu the password to her online NYLIFE account and orally authorized him to trade her NYLIFE account. Dr. Hu did not give Lu written authorization to exercise discretion over this account, and NYLIFE prohibited its associated persons from exercising discretion in customer accounts. Dr. Hu testified that, as soon as she had funded her NYLIFE account with her Vanguard mutual fund shares, she told Lu options trading was too risky and asked him to confine his trading to covered calls.
In June 2000, Lu made approximately thirteen options trades in Dr. Hu's NYLIFE account. Lu admitted to the Hearing Panel that he traded options in Dr. Hu's NYLIFE account and made the decisions regarding which options to buy and sell. Lu's options trades during June and July 2000 resulted in losses to Dr. Hu's NYLIFE account.9 [380][382][385]
Around July 7, 2000, Lu gave Dr. Hu $10,000 of his own money, claiming that he was "purchasing" her NYLIFE account, which by then was worth only $7,420.87. Lu subsequently changed the account's online password. The account, however, remained titled in Dr. Hu's name.
On July 10, 2000, Lu liquidated several options in Dr. Hu's NYLIFE account at a steep loss. For example, he sold a call option on PMC-Sierra Inc., which he had bought in June 2000, at a loss of $13.75 per share. On July 21, 2000, Dr. Hu wrote in an electronic mail message to Lu, "I sent you email to let you know I don't want you to trade my NY life account." However, Lu continued to trade options in Dr. Hu's NYLIFE account through the end of August 2000. As the registered representative listed on the account, Lu received a flat $6 commission for each online trade in the account and earned approximately $300 in commissions from those trades.
On September 18, 2000, Dr. Hu filed a letter of complaint against Lu with the Maryland Attorney General (the "AG"). On September 26, 2000, the AG's office sent a letter to NYLIFE describing in detail the allegations set forth in Dr. Hu's complaint letter (the "AG's letter"). On October 2, 2000, Lu's supervisor, James Adkins, gave Lu a copy of the AG's letter and requested that Lu reply in writing to the allegations. The next day, Lu submitted to Adkins a letter, dated October 2, 2000 (the "October 2 Letter"), stating, among other things, that Lu "told [Dr. Hu] that I couldn't trade her NYLIFE Securities account due to [New York Life's] company rules . . . [but] I still felt that I should help her out" and "following with optioninvestor.com's recommendations, I bought some options for [Dr. Hu's Schwab] account . . . ." Lu also explained in the October 2 Letter that, when he gave Dr. Hu $10,000 to "purchase" her NYLIFE account, "her account actually became my own account . . . . Because all money was mine, I could trade whatever I want to trade."
NYLIFE prohibited its employees from exercising discretionary authority in customer accounts. In a NYLIFE compliance form that Lu completed on March 31, 2000, Lu checked the box marked "Yes" in response to the question "Do you understand and comply with the requirement that you may not act . . . on behalf of a client either with or without the client's permission (e.g. exercising discretionary authority over a customer account)?"10 [1080-81][779] Dr. Hu testified that Lu told her he could not accept commissions because NYLIFE's policies prohibited his trading the NYLIFE account, indicating Lu's awareness that NYLIFE prohibited its representatives from exercising discretion in customer accounts. While Lu does not dispute Dr. Hu's testimony on this point, he maintains that he refused compensation from her because she was a fellow immigrant from his hometown.
On October 10, 2000, NYLIFE terminated Lu's employment. Adkins testified that he explained to Lu that Lu was being discharged for "[e]xercising discretion on [sic] a client's accounts. There were several [NYLIFE] violations, but that certainly was the most serious."11 [774][395][792][838,831] NYLIFE subsequently paid Dr. Hu $80,000 for the total losses she incurred as a result of Lu's options trades in both her Schwab and NYLIFE accounts.
After his discharge from NYLIFE, Lu sought employment at MetLife Insurance Company ("MetLife"), but, when he informed MetLife that he left NYLIFE "because of some complaint," MetLife refused to hire him. Lu then found employment with member firm Globalink Securities, Inc. ("Globalink"). On October 20, 2000, Lu completed a Form U-4 in connection with his registration as a representative for Globalink. In response to Question 23J(1) of Form U-4, which asked whether Lu had, among other things, "ever voluntarily resigned, been discharged or permitted to resign after allegations were made that accused" him of "violating investment-related statutes, regulations, rules, or industry standards of conduct," Lu checked the box in the column marked "No."12
A. Failure to Give Notice to Member and Executing Firm. Conduct Rule 3050(c) requires an associated person "prior to opening an account or placing an initial order for the purchase or sale of securities with another member" to "notify both the employer member and the executing member, in writing, of his [] association with the other member."13 Conduct Rule 3050(e) further provides that the notice requirements of Conduct Rule 3050(c) apply to any account over which the associated person has discretion.14
Lu exercised discretionary authority to buy and sell securities in Dr. Hu's Schwab account.15 Lu admitted in the October 2 Letter that, after Dr. Hu gave him the password to her Schwab account, "I bought some options for her account . . . ." When the Hearing Panel asked Lu if he was "making the decisions of which options to buy and which options to sell" in Dr. Hu's Schwab account, Lu replied, "[c]orrect."
Before trading Dr. Hu's Schwab account, Lu did not notify either NYLIFE or Schwab. Lu contends that he did not break any rules because his trading of Dr. Hu's online accounts was a "private matter" between himself and Dr. Hu. However, the requirements of Conduct Rule 3050(c) that a registered representative disclose the exercise of discretion in an account at another member firm to both his employing member firm and the executing member firm are designed to prevent this kind of "private matter" that could expose the member firms to risk.
Lu claims that "[a]t no time did I believe I was breaking any rules" because, he asserts, "there is no any rules or regulations regarding the online trading in an ordinary person (non-stockbroker)'s private home spending private time on his/her own personal computer . . . ." In fact, Conduct Rule 3050(c) requires notice regardless of how or where the associated person effectuates the trades.16 We find that Lu violated Conduct Rules 3050(c) and 2110 when he failed to notify both NYLIFE and Schwab, in writing, that he was exercising discretionary authority over a Schwab account while he was associated with NYLIFE.17
B. Unauthorized Exercise of Discretion. Conduct Rule 2510(b), as relevant here, prohibits a registered representative from exercising any discretionary power in a customer's account without prior written authorization from the customer and written acceptance by the member firm.18 This requirement enables the member firm to supervise all discretionary accounts.19
Lu knew that NYLIFE prohibited its registered representatives from exercising such discretion. Lu stated in the October 2 Letter that he "couldn't trade [Dr. Hu's] NYLIFE Securities account due to [New York Life's] company rules."20 Lu indicated on the NYLIFE compliance form that he was aware of NYLIFE's prohibition against exercising discretionary authority over a client's account. Despite this prohibition, Lu "still felt that I should help her out."
The record demonstrates that Lu exercised discretionary authority over Dr. Hu's NYLIFE account. Dr. Hu gave Lu the password to her NYLIFE account and orally authorized him to trade that account, but did not give him written authorization.21 He subsequently changed the password so only he could have access to the account. Because Lu concealed his discretionary authority over Dr. Hu's NYLIFE account, NYLIFE did not have the opportunity to enforce its policy against its registered representatives exercising discretion over customer accounts or otherwise supervise his actions.
Lu admitted to the Hearing Panel that he traded options in Dr. Hu's NYLIFE account and made the decisions regarding which options to buy and sell. Lu asserts that his options trades in Dr. Hu's NYLIFE account were not discretionary because she controlled the account and discussed with him what trades to make. Lu not only admitted making trades in this account, but also traded contrary to Dr. Hu's instructions to restrict his trades in the account to covered calls. Moreover, Lu's discretionary authority over Dr. Hu's NYLIFE account was so absolute that, after he purportedly "purchased" Dr. Hu's account, he changed Dr. Hu's NYLIFE account password without consulting her and ignored her online pleas to stop trading that account. We find that Lu possessed discretionary authority over Dr. Hu's NYLIFE account.
Lu claims that he did not consider Dr. Hu his customer because she did not purchase life insurance from him. Regardless of whether or not Dr. Hu purchased life insurance from him, Dr. Hu was, in fact, Lu's customer with respect to the trades in her NYLIFE account. He also asserts that he did not expect any compensation from trading her accounts. However, Lu was the registered representative listed on Dr. Hu's NYLIFE account. He in fact earned approximately $300 in commissions for his options trades in that account.
Lu argues that NYLIFE's restriction against exercising discretion in a customer's account does not apply to online trading. However, NASD's prohibition against registered representatives exercising discretion without prior written authorization, which is at issue here, does not distinguish between online and other trading activity. We find that Lu violated NASD Conduct Rules 2110 and 2510(b) by exercising discretionary authority in Dr. Hu's NYLIFE account without prior written authorization from Dr. Hu and NYLIFE.22
C. False Answer on Form U-4. Membership Rule IM-1000-1 prohibits the filing, in connection with membership or registration as a registered representative, of information so incomplete or inaccurate as to be misleading.23 We have previously stated that the Form U-4 is used by NASD and other self-regulatory organizations to determine the fitness of applicants for registration as securities professionals.24 Consequently, the candor and forthrightness of applicants is critical to the effectiveness of the screening process.25
Question 23J(1) of the Form U-4 that Lu completed asked, among other things, whether Lu had ever "been discharged . . . ." NYLIFE discharged Lu after it informed Lu of Dr. Hu's complaint concerning Lu's handling of her account. Adkins explained to Lu at the time of his discharge that NYLIFE was terminating Lu primarily for "[e]xercising discretion on [sic] a client's accounts." After his discharge, Lu found it difficult to find another job. MetLife rejected him after he disclosed to them the reason for his discharge from NYLIFE. When he found employment at Globalink and was required to complete a new Form U-4, he answered Question 23J(1) in the negative.26 We fail to see how Lu could have reasonably concluded that a negative response was permitted.27
Lu maintains that the president of Globalink advised him not to disclose the discharge on the Form U-4 because the matter was pending. However, a registered representative is responsible for his actions and cannot shift that responsibility to the firm or his supervisor.28
Lu also argues that he did not see Dr. Hu's actual complaint until January 2001. We note, however, that the AG's letter (a copy of which Adkins gave to Lu) fairly represented the allegations contained in Dr. Hu's complaint. Adkins explained to Lu the reasons for his discharge and identified the NYLIFE rules Lu had violated, based on the allegations in the AG's letter. We find that Lu violated Conduct Rule 2110 and Membership Rule IM-1000-1 by providing a false answer on the Form U-4 filed in connection with his association with Globalink.
D. Alleged Unsuitable Transactions. Conduct Rule 2860(b)(19) requires a registered representative to have reasonable grounds for believing, on the basis of information furnished by the customer, after reasonable inquiry concerning the customer's investment objectives, financial situation, needs, and any other information known by the representative, that the recommended transaction is not unsuitable for the customer.29
Before the Hearing Panel, Dr. Hu testified that she had an annual income of $50,000 from her previous job, owned a Vanguard mutual fund account worth approximately $30,000, and owned two houses as investment property. Dr. Hu's Schwab brokerage account alone was worth approximately $166,000 at the time. On her NYLIFE account forms, she estimated her net worth at around $200,000 and her tax bracket at over twenty-eight percent. She also represented that she was an experienced investor.30 The Hearing Panel found that the preponderance of the evidence did not support the charge of unsuitability. Lu contends that the NAC erred when it reversed the Hearing Panel's finding on the suitability issue. In light of Lu's other violations and the sanctions imposed, we need not reach the unsuitability charge.
A. Lu asserts that he is the victim of improper selective prosecution. He contends it was "unfortunate and ridiculous for the NAC to abuse their power" by finding his conduct a "‘serious risk'" to the "‘investing public'" and accuses "the NAC [of creating a] false charge like this[.]" To prevail on the improper selective prosecution claim, Lu must establish that he was singled out for enforcement action while others similarly situated were not, and that his prosecution was motivated by arbitrary or unjust considerations such as his race, religion, or the desire to prevent his exercise of a constitutionally protected right.31 Lu has failed to substantiate any of these elements and we find that he was not the victim of impermissible selective prosecution.
B. Lu claims that NASD failed to afford him due process when the Hearing Officer denied his motion to compel the production of certain categories of documents.32 Exchange Act Section 15A(b)(8) requires NASD to have fair procedures.33 NASD Procedural Rule 9251 requires NASD's enforcement division to produce all documents prepared or obtained by it in connection with the investigation leading up to the institution of proceedings.34 The record indicates that NASD's Division of Enforcement ("NASD Enforcement") produced to Lu all the materials that NASD rules required it to produce. At a prehearing conference, NASD Enforcement identified the documents it had produced to Lu, including documents obtained from the Maryland Securities Division that were part of the Maryland Securities case against Lu, documents that had been produced previously by Lu in connection with that case, information about Dr. Hu's Schwab account, Dr. Hu's NYLIFE account documents, all written statements NASD Enforcement had obtained (such as any affidavits that Dr. Hu had sworn), transcripts of the Maryland Securities Division hearing, other documents received from the Maryland Securities Division, and a letter from NASD Enforcement to Lu listing documents it thought that Lu already possessed.35
NASD Procedural Rule 9252 further allows a respondent to request that NASD invoke NASD Rule 8210 (governing the provision of information) to compel the production of documents at the hearing.36 The Hearing Officer will grant the request only upon a showing that the information sought is relevant, material, and non-cumulative, and that the requesting party has previously attempted, in good faith, to obtain the information. The request will be denied if it is unreasonable, oppressive, excessive in scope, or unduly burdensome.
The Hearing Officer denied Lu's motions because he concluded that Lu's document production requests either were not specific enough and therefore unreasonable, excessive, or unduly burdensome, or were irrelevant or immaterial to the proceeding. The Hearing Officer determined, for example, that Lu's request for all documents relating to the affidavit Adkins filed in the Maryland Securities Division proceeding against Lu did not identify specific documents, but rather accused Adkins of submitting a false affidavit in that case.37 The Hearing Officer ruled that the Maryland Securities Division case was not material to NASD's proceeding against Lu, noting that NASD had the independent burden of proving its allegations against Lu. Lu had the affidavit and could challenge Adkins's credibility with it.
The Hearing Officer also concluded that documents relating to NYLIFE's settlement with Dr. Hu and restitution of the settlement amount from Lu, and documents related to "NYLIFE's wrongful treatment" of Lu, were immaterial to the charges at issue in the NASD proceeding.38 Lu further had the opportunity to cross-examine both Adkins and Dr. Hu at the hearing about the information he sought from them. The record demonstrates that Lu received fair process under NASD rules.39
Exchange Act Section 19(e)40 provides that we will sustain NASD's sanction unless we find, having due regard for the public interest and the protection of investors, that the sanctions are excessive or oppressive or impose an unnecessary or inappropriate burden on competition.41 NASD concluded that Lu's violation of Conduct Rule 3050 alone warranted a bar, as did Lu's failure to complete his Form U-4 accurately.42 NASD concluded that Lu's misconduct was egregious. Lu objects that the sanction of a bar is unduly harsh and excessive.
NASD's sanctions fall within its Sanction Guidelines.43 NASD reasoned that, even if Lu had been motivated by "honorable intentions" to help a fellow immigrant, as he claimed, they were "insufficient to overcome the startling deviations from the standards imposed upon registered representatives as demonstrated by his misconduct." NASD identified as aggravating factors Lu's failure to appreciate the gravity of his misconduct, the potential threat of his actions to the public interest, his failure to accept responsibility for his conduct, and his indifference to .NASD's rules. Lu asserts that he has no interest in associating with NASD and wants nothing to do with the investing public for the rest of his life.44 Under the circumstances, we do not find NASD's sanction to be excessive nor oppressive.45
An appropriate order will issue.46
By the Commission (Chairman DONALDSON and Commissioners CAMPOS and ATKINS); Commissioners GLASSMAN and GOLDSCHMID not participating.
Jonathan G. Katz
Secretary
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In the Matter of the Application of GUANG LU For Review of Disciplinary Action Taken by NASD |
On the basis of the Commission's opinion issued this day, it is
ORDERED that the sanctions imposed by NASD on Guang Lu for his failure to give notice to New York Life Securities, Inc. and Charles Schwab and Co. Inc., his failure to obtain written authorization before transacting trades in discretionary accounts, and providing a false answer on his Form U-4, and NASD's assessment of costs, be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
Lu accuses Adkins of perjury because Adkins filed a supplemental declaration on December 7, 2001 clarifying that, when he referred to "‘Dr. Hu's complaint'" in his November 16, 2001 affidavit in a Maryland Securities Division proceeding, he was in fact referring to the AG's letter summarizing Dr. Hu's allegations rather than to the actual complaint letter that Dr. Hu sent to the AG's office. This inaccuracy is immaterial. The AG's letter fully described Dr. Hu's complaint.
Lu also claims that an affirmative answer is warranted only when all subparts of Question 23J(1) are true. We are not persuaded by this interpretation of the question since its various terms are separated by the word "or."
Rule 452 of our Rules of Practice, 17 C.F.R. § 201.452, requires a showing that there were reasonable grounds for failure to adduce such evidence previously and that the additional evidence is material. Because the Fourth Circuit decision was handed down on November 10, 2004, Lu is able to show that there were reasonable grounds for his failure to adduce that decision previously. However, Lu has not shown how the unpublished Fourth Circuit decision, which deals with an insurance dispute between Lu and his Errors and Omissions insurance carrier, is material. Accordingly, we deny both his motion to adduce such evidence and his request to suspend our consideration of his appeal.
http://www.sec.gov/litigation/opinions/34-51047.htm
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