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UNITED STATES OF AMERICA
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In the Matter of Dale E. Frey, Respondent |
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ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AGAINST DALE E. FREY PURSUANT TO SECTIONS 15(b) AND 19(h) OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
On September 26, 2000, the Securities and Exchange Commission ("Commission") issued an Order Instituting Public Proceedings Pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Dale E. Frey ("Frey").
Frey has submitted to the Commission an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings, except the jurisdiction of the Commission over him and over the subject matter of these proceedings and the facts in Section II, paragraph A, which he admits, Frey consents to the entry of this Order Making Findings and Imposing Remedial Sanctions Against Dale E. Frey Pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Order").
II.
On the basis of this Order and the Offer submitted by Frey, the Commission finds1 that:
A. Dale Frey
Frey was associated with, and a principal of, D. E. Frey and Company, Inc. ("D.E. Frey"), a corporation registered with the Commission as a broker-dealer. Frey served as its chief executive officer and a member of the hiring review committee. Frey was also chairman of the board of directors of D.E. Frey's parent, D.E. Frey Group, Inc.
B. Summary
Between 1995 and 1999, three registered representatives at D.E. Frey, each of whom had a disciplinary history or history of customer complaints, engaged in one or more sales practice abuses including unsuitable trading, unauthorized trading or churning in customer accounts. Frey failed reasonably to supervise those registered representatives to prevent or detect violations of the securities laws by those three registered representatives by failing to develop procedures at D.E. Frey for imposing heightened supervision where appropriate and failing to develop a system and commit adequate resources for implementing the supervisory procedures the firm did have in place.
C. Unsuitable Trading, Unauthorized Trading and Churning in Customer Accounts by Registered Representatives
1. In 1998 and 1999, a registered representative of D.E. Frey located at an office of supervisory jurisdiction ("OSJ") in Colorado Springs, Colorado ("the Colorado Springs representative"), engaged in unsuitable trading in the accounts of three elderly D.E. Frey clients who had stated investment objectives of growth and safety. The Colorado Springs representative engaged in margin trading, purchasing options, investing in high yield funds and regularly selling a security and buying it back shortly thereafter. In addition, the Colorado Springs representative churned two of those accounts.
2. In 1998, a registered representative and branch manager of D.E. Frey located at an OSJ in Atlanta, Georgia ("the Atlanta representative"), made unsuitable trade recommendations involving options transactions to two D.E. Frey clients who were not approved for the transactions, had not completed options agreements, and had stated investment objectives including preservation of capital and avoidance of risk.
3. From October 1995 through May 1996, a registered representative of D.E. Frey located at an OSJ in Denver, Colorado ("the Denver representative"), churned and engaged in unsuitable trading for the account of one customer. The Denver representative failed to follow the customer's directions to avoid risk to principal, and make conservative investments; instead, the Denver representative invested in a high-risk fund and engaged in excessive use of margin trading. The Denver representative also made unsuitable trades in the accounts of three other clients and engaged in unauthorized trading in one of those accounts. Each customer had a stated investment objective of conservative growth and each sustained losses when the Denver representative: (1) engaged in mutual fund switching in one account to increase his commissions, (2) invested in a high risk fund in two of the accounts, (3) took a short position in the same high risk fund for one account, and (4) failed to follow sell instructions from one customer.
D. Frey's Failure to Supervise
1. D.E. Frey had 48 branch offices. Registered representatives at D.E. Frey were independent contractors and were not employees of D.E. Frey. Thirty-six of D.E. Frey's 48 branch offices were OSJ offices; three of those OSJ offices were the location of violations by the registered representatives in Colorado Springs, Atlanta and Denver.
2. According to D.E. Frey's compliance manuals, branch managers of OSJ offices were required to review trading activity, customer correspondence and statements, respond to exception reports, conduct internal inspections, meet with registered representatives and conduct compliance meetings. Specifically, D.E. Frey's written supervisory procedures required that branch managers review and initial all trade tickets daily and review all customer monthly statements at least three times a year, with a particular sensitivity to actively traded accounts, the suitability of investments and the reasonableness of investment activity. Monthly checklists of tasks to be performed were provided.
3. Frey's responsibilities with respect to OSJ offices consisted of annual oversight audits by the compliance department. In the audits, the compliance department was tasked with reviewing trade tickets, customer correspondence and statements, and customer complaints. Moreover, the departments of compliance and supervision were responsible for reviewing exception reports and periodically reviewing branch office trading activities.
4. Frey knew or should have known that D.E. Frey lacked a system to implement firm procedures and did not commit adequate resources to develop or implement such a system.
5. D.E. Frey's compliance and supervision departments also did not adequately review exception reports on the Colorado Springs branch that noted excessive trading activity, excessive losses, excessive commissions, and trading activity inconsistent with account investment objectives. D.E. Frey's written supervisory procedures required the compliance department to send activity reports to the manager of the relevant branch office; the branch manager then was required to investigate and report back to the compliance department. However, D.E. Frey's supervision department failed to follow up on the activity reports to determine if a branch manager reviewed the trading, if the explanations offered by the registered representative were valid, or if additional corrective measures needed to be taken. Further, the supervision department failed to coordinate the review of exception reports with compliance department personnel.
6. As chief executive officer of D.E. Frey, Frey oversaw the firm's compliance and supervisory functions. He was responsible for the hiring of supervisory personnel and mandated that he be personally consulted on all significant compliance matters. Frey was also responsible for ensuring that appropriate heightened supervision was imposed on registered representatives with disciplinary histories. Because of his role in the recruitment of registered representatives, Frey knew that the Atlanta representative, the Colorado Springs representative and the Denver representative, had significant disciplinary histories that should have required increased day-to-day supervision.
7. When D.E. Frey hired the Colorado Springs representative in June 1997, his registration to sell securities in Colorado was subject to a "special supervision order" because of previous customer complaints. Accordingly, the firm agreed with the state of Colorado that he would be subject to increased supervision. Further, the firm prohibited the Colorado Springs representative from exercising discretion over any client accounts. Although D.E. Frey designated a branch manager as responsible for supervision of that registered representative, Frey did not establish adequate policies or procedures to determine whether increased supervision of the Colorado Springs representative was implemented.
8. The Atlanta representative was the subject of prior customer complaints involving unauthorized and unsuitable trading activity prior to becoming associated with D.E. Frey. When the Atlanta representative associated with D.E. Frey in 1994, he was required to agree to increased supervision and other restrictions as a condition of his registration in six states which restrictions expired by their terms, at the latest, February 1998. Thereafter, despite his knowledge of the registered representative's history, Frey did not establish adequate policies or procedures to determine whether increased supervision of the Atlanta representative was implemented.
9. Before associating with D.E. Frey, the Denver representative had been discharged by his former employer for unauthorized trading in a client's account. Notwithstanding Frey's knowledge of that discharge and the reasons for it, Frey did not establish or implement sufficient procedures for increased supervision of the Denver representative.
10. The registered representatives in Colorado Springs, Atlanta and Denver violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder in that, directly or indirectly, in the offer or sale, or in connection with the purchase or sale, of securities by use of the means or instrumentalities of interstate commerce or by use of the mails, they employed devices, schemes or artifices to defraud; obtained money or property by means of or otherwise made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, transactions, practices, or courses of business which would or did operate as a fraud or deceit. Specifically, the Colorado Springs representative engaged in unsuitable trading in three client accounts and churned two of those accounts. The Atlanta representative made unsuitable trading recommendations to two clients. The Denver representative churned and engaged in unsuitable trading for the account of one client but also made unsuitable trades in the accounts of three other clients and engaged in unauthorized trading in one of those accounts.
11. Frey has submitted a sworn financial statement and other evidence and has asserted his inability to pay a civil penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Frey and has determined that Frey does not have the financial ability to pay a civil penalty.
III.
Based upon the foregoing, Frey failed reasonably to supervise the representatives in Colorado Springs, Atlanta and Denver, by failing to insure that adequate procedures were in place and were implemented to supervise them, with a view toward preventing their 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)(6) of the Exchange Act, which incorporates Section 15(b)(4)(E) of the Exchange Act.
IV.
In view of the foregoing, the Commission deems it appropriate, in the public interest and for the protection of investors to accept the Offer submitted by Frey and to impose the sanctions specified therein.
Accordingly, IT IS ORDERED that:
A. Frey be, and hereby is censured; and
B. Frey be, and hereby is, suspended from association with any broker or dealer for a period of three months, effective on the second Monday following the entry of this Order, and suspended for a period of 12 months thereafter from association in a supervisory or proprietary capacity with any broker or dealer. Frey shall provide to the Commission, within 30 days after the end of each suspension period described above, an affidavit that he has complied fully with the suspension.
C. The Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Frey provided accurate and complete financial information at the time such representations were made; (2) determine the amount of the civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Frey's Offer had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Frey was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed and whether any additional remedies should be imposed. Frey may not, by way of defense to any such petition, contest the findings in the Order or the Commission's authority to impose any additional remedies that were available in the original proceeding.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | The findings herein are made pursuant to Frey's Offer of Settlement and are not binding on any other person or entity. |
http://www.sec.gov/litigation/admin/34-44982.htm
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