==========================================START OF PAGE 1====== INITIAL DECISION RELEASE NO. 78 ADMINISTRATIVE PROCEEDING FILE NO. 3-8512 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION ____________________________ : In the Matter of : : CAROLE L. HAYNES : INITIAL DECISION : NOVEMBER 24, 1995 : ____________________________ : APPEARANCES: David S. Horowitz and Merri Jo Gillette, Division of Enforcement, Securities and Exchange Commission Lionel E. Pashkoff, Attorney for the Respondent BEFORE: Glenn Robert Lawrence, Administrative Law Judge These public proceedings were instituted by an Order of the Securities and Exchange Commission dated September 30, 1994 ("Order"), issued pursuant to Sections 15(b), 19(h), and 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether allegations of misconduct made by the Division of Enforcement ("Division") against Carol L. Haynes ("Haynes" or "Respondent") are true and what, if any, remedial action would be appropriate in the public interest. In substance, the Division alleged that over the period from January 5, 1989 to July 31, 1990 ("trading period"), there was a fraudulent market manipulation scheme conducted by John G. Broumas ("Broumas"), former chairman of the board of Madison National Bank of Virginia ("Madison of Virginia") and a former director of James Madison Limited ("JML"). Respondent Haynes is the sole owner and president of First Potomac Investment Services, Inc. ("First Potomac"), a registered broker- dealer, located in Falls Church, Virginia. The Division alleges that from May 8, 1989 to April 14, 1990, Haynes willfully aided and abetted Broumas and caused his violations of Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder by, among other things, executing 61 wash trades and matched orders-[1]- in JML stock. By answer dated October 17, 1994, -[1]- Wash trades are purchases and sales of securities that match each other in price, volume and time of execution, and involve no change in beneficial ownership. Matched orders are similar to wash trades but involve a related third person or party who places one side of the trade. Order at 2 n.2. ==========================================START OF PAGE 2====== Haynes largely denied the allegations in the Order. In her post- hearing brief pages 2-6, Respondent contends that the Division has not proved she aided and abetted Broumas, was reckless, or that she knew of Broumas's illegal conduct. Further, Respondent alleges that there was no impact on the market by her conduct and that the NASD misled her as to what was proper in the circumstances. The findings and conclusions herein are based upon the preponderance of the evidence as determined from the record and upon my observation of the various witnesses that testified at the hearing that was held in Washington, D.C. from December 12 through December 14, 1994, and April 17 and 18, 1995, as well as the briefs, arguments and proposals of facts and law of the parties and the relevant statutes and regulations. FINDINGS OF FACT AND CONCLUSIONS OF LAW The Commission filed a complaint in the U.S. District Court for the District of Columbia against Broumas on September 27, 1991.-[2]- It was alleged that from January 1989 through July 1990, Broumas violated the federal securities laws by marking-the-close-[3]- and executing wash trades and matched orders in JML stock. At the same time, Broumas consented, ---------FOOTNOTES---------- -[2]- SEC v. John G. Broumas, Civil Action No. 91-2449 (L.R. No. 12999). -[3]- Marking-the-close trades occur when stock is purchased at or near the end of the trading day on an uptick (i.e. a purchase executed for a price higher than the previously executed trade), in order to affect the closing price. Order at 2 n.2. ==========================================START OF PAGE 3====== without admitting or denying the allegations, to the entry of a permanent injunction prohibiting him from future violations of Sections 9(a)(1), 9(a)(2), 10(b) and 16(a) of the Exchange Act and Rules 10b-5 and 16a-3 thereunder. Ex. 830.-[4]- Broumas's Manipulation Scheme In 1989 and 1990, JML Class A common stock was listed on the American Stock Exchange ("AMEX"). As of November 7, 1989, there were 6,490,126 shares of that stock outstanding. Officers and directors owned about 32%, leaving a float of approximately 4,413,200 shares. Officers and directors of JML also owned 37% of JML common stock, which was traded over-the-counter and was convertible into the Class A stock, share for share. Ex. 300 (8/17/90 memo); Dec. Tr. 347 (Savarese). Between January 1989 and January 1990, the price of JML Class A stock traded in a range between $5 5/8 and $7 1/2 (closing price), with most closing prices higher than $6 per share. In February 1990, the price declined, and fell to $2 1/2 per share on July 20, 1990. From March 16, 1990 through May 9, 1990, the closing price was between $5 and $5 1/2 per share. After May 9, 1990, it remained below $5 per share again. Ex. 306. On December 31, 1986, JML became owner of the McLean Bank, which changed its name to Madison National Bank of Virginia. -[4]- References to the page numbers of the transcript of the hearing held in these matters on December 12, 13 and 14, 1994 are noted as "Dec. Tr. ( )." References to the page numbers of the transcript of the hearing held April 17 and 18, 1995, are noted as "Tr. ( )." All references to the Division's Exhibits admitted into evidence at the hearing are indicated as "Ex. ." "RPFF" refers to Respondent's Proposed Findings of Fact. ==========================================START OF PAGE 4====== Dec. Tr. 120-121 (Broumas). Broumas, a substantial stockholder in the McLean Bank, received a combination of stock and cash for his $6 million interest. Dec. Tr. 121-122 (Broumas). He stayed on as chairman of the board of Madison of Virginia until May 24, 1990, and a member of the board of JML, the holding company, until May 24, 1990. Dec. Tr. 122 (Broumas). Broumas obtained equal shares of both JML Class A and common stock. Dec. Tr. 122- 123 (Broumas). Broumas owned approximately 198,000 shares of JML Class A common stock on January 31, 1989 [Ex. 808], and on March 13, 1989, Broumas owned 193,268 shares or 2.98% of the total amount outstanding. Ex. 300 (8/17/90 Memo, p. 6); Ex. 807. He was very wealthy, but suffered severe financial reverses early in 1989. Ex. 120 at 19, 34-36; Ex. 807 at 3. In October 1987, when the market crashed, Broumas held, mostly on margin, 225,000 shares of Syntec stock. After the crash, Syntec dropped from $16 to $4 per share, resulting in Broumas receiving margin calls on the stock. To meet those calls, he borrowed approximately $300,000 from Madison of Virginia. Dec. Tr. 123-125. On May 1, 1989, Broumas was personally liable on notes owed to banks in the amount of $2,733,064, and owed $904,000 in mortgages with payments of $128,008 per quarter. Ex. 801; Dec. Tr. 168-173 (Broumas). Many of his liquid assets were in the form of JML stock, both Class A and common, which were held in margin accounts. Dec. Tr. 173-174 (Broumas); Ex. 801. As of May 1, 1990, Broumas's bank loans totaled $2,621,981, with quarterly payment requirements of at least $104,500. Broumas was having ==========================================START OF PAGE 5====== difficulty meeting those interest and loan payments. In addition, the value of his real estate holdings was dropping. Ex. 801, 802; Dec. Tr. 175-176 (Broumas). As a result of these liabilities, among others which he could not repay, Broumas eventually filed for personal bankruptcy, pursuant to Chapter 7, in February 1991. Dec. Tr. 214-215 (Broumas); Ex. 800. In November 1994, the United States Attorney for the District of Columbia filed an Information against Broumas charging him with one count of misapplication of funds by a bank officer in violation of 18 U.S.C.  656 (United States v. Broumas, Crim. No. 94-442 (D.D.C.)). Ex. 706. The Information alleged a check- kiting scheme conducted by Broumas, using six separate bank accounts at three banks, including Madison of Virginia and Madison of Washington. The purpose of the scheme was to use the float generated by writing checks against accounts for which insufficient funds existed, and using the checks to meet stock margin calls for JML stock from April through June, 1990. On November 23, 1994, Broumas pled guilty to this Information and admitted to the conduct charged. Ex. 720; Dec. Tr. 209-212 (Broumas). Broumas's Trading Activity During 1989 and 1990, Broumas controlled approximately 25 different brokerage accounts, in his own name and others, located at 14 different broker-dealers, through which he placed his wash trades, matched orders, and marking-the-close trades in JML Class A stock. Ex. 1. During 1989 and 1990, Broumas held three ==========================================START OF PAGE 6====== accounts at H. Beck--a joint account, and accounts in the name of Les Girls and BC Theatres. He held two brokerage accounts at Lara Millard, one in joint name with his wife and one in the name of BC Theatres. He had two accounts at Scott & Stringfellow, one held in the name of John Broumas and the other a joint account with his wife. He had two accounts at Voss & Company, one in a joint name and the other in the name of Les Girls. He had three accounts at First Potomac--one in joint name, one in the name of Les Girls, and one in the name of BC Theatres. Broumas had one account at Capitol Securities jointly with his wife, and another at City Securities Corporation. He had a joint account at Investors Group, Ltd. Broumas had two accounts at Johnston Lemon each held in the name of John Broumas. He had one account at Koonce Securities in a joint name, and one in his name at Staib Roberts. He had three accounts at Swan Securities--one in joint name, one as BC Theatres, and one as Les Girls. He had a joint account at Titan Value Equities Group. Broumas had an account in his name at Washington Investment Corp. He had three accounts at Carey Jamison Securities--in joint name, BC Theatres, and Les Girls. Dec. Tr. 126-142 (Broumas). Broumas had sole authority to place trades, and he was the only person who traded in these accounts; he paid for them out of funds he controlled; and when shares were sold, he received payment. He had the power to control or direct the voting of the shares of JML stock in these accounts during 1989 and 1990. Dec. Tr. 126-142 (Broumas). In 1989 and 1990, Broumas held his ==========================================START OF PAGE 7====== JML Class A stock in margin accounts, and he received margin calls that he had to meet or risk sale of the stock. Dec. Tr. 186-189 (Broumas). Broumas believed that broker-dealers required that stock must have a value of $5 or more to be held on margin. Dec. Tr. 192 (Broumas). Eventually, Broumas received margin calls from his brokers that he could not meet, and all of his accounts that held JML Class A stock were sold out by the brokers. Dec. Tr. 212-213 (Broumas). In order to meet margin calls in 1989 and 1990, Broumas admitted that he sold JML stock to himself many times. He called brokers during that time period and asked them whether he had any equity in his margin accounts. Dec. Tr. 193 (Broumas). Then he would direct that shares be bought or sold from one account controlled by him into other accounts controlled by him. Dec. Tr. 193-194 (Broumas); Ex. 1. Between January 1, 1989, and June 30, 1990, Broumas ordered approximately 545 trades of JML Class A stock. Ex. 1. Of this amount, 420 trades constituted 203 sets of wash trade or matched order transactions. These trades typically involved the purchase and sale of between 3,000 and 12,000 shares of JML stock. Ex. 2. Broumas orchestrated these trades through at least 29 brokerage accounts that he maintained or controlled at 13 brokerage firms in the Washington, D.C. area. Ex. 2, 6. Broumas could not go to the JML banks and borrow cash because he had reached his limit. Dec. Tr. 201 (Broumas). He therefore arranged wash trades and matched orders for the purpose of obtaining a float in a scheme similar to check-kiting. Under ==========================================START OF PAGE 8====== this scheme, Broumas orchestrated trades between accounts he held at different brokerage firms by calling registered representatives on each side of his trades and giving them instructions to call each other and to trade a specific amount of his JML Class A stock at a specified price. Broumas knew that by calling both sides of the trades, the trades would be executed on the over-the-counter market. Once the trades were completed, Broumas obtained the proceeds from the sale side one day later, but waited until the settlement date at least one week later to pay for the corresponding buy side of the trade. When the settlement date arrived, he sometimes executed another set of wash trades or matched orders and repeated the process. By engaging in this activity, Broumas could, in effect, obtain a "loan" from the brokerage firms where he traded his JML stock. Similarly, Broumas arranged a smaller number of matched orders by following the same procedure, except that he solicited third parties, nominees, to call in one side of the trade. Dec. Tr. 195-201 (Broumas). Broumas was able to borrow cash by this method of selling shares to himself, and did this instead of selling JML stock to a buyer in the open market because he wanted to maintain his large holdings of JML stock "at that price." It was important to him to maintain the same general level of JML stock ownership. Dec. Tr. 199-200 (Broumas). For each of the 203 transactions, Broumas made two phone calls, one to each broker on either side of each trade. Ex. 2. In instances where stock was moved to or from ==========================================START OF PAGE 9====== accounts that he controlled (John Broumas, John and Ruth Broumas, Les Girls or BC Theatres) to or from nominee accounts, the mechanics of how the calls were made and how the trade was executed was the same as when he moved stock between his own accounts. Dec. Tr. 202-203 (Broumas). In addition to his own accounts, Broumas also traded JML Class A stock through the accounts of four nominees: a business associate as well as three former Madison employees, one of whom was his grandson--L. Lawton Rogers (a respondent in one of the related Commission administrative proceedings, Admin. Proc. File No. 3-8513); grandson Matthew Johnson; Michael Connolly; and Kevin Lemmon. Ex. 2, 6. Broumas initiated this arrangement with each nominee. During the trading period, L. Lawton Rogers ("Rogers") maintained accounts at H. Beck, Voss & Co., and First Potomac which Broumas controlled. Ex. 120 (pp. 14-15), 280, 281. Rogers ordered, at Broumas's request, 21 trades of JML stock through the above-mentioned accounts. The value of Rogers's trades in JML stock totaled approximately $1,060,000. Seventeen of the trades amounted to matched orders, and the other four were two sets of trades that washed between Rogers's accounts. Ex. 2, 6. Broumas directed Rogers to call specific registered representatives and place a buy or sell order at a specific price for JML stock. Rogers then called in the trade, giving the registered representative the price, amount of shares, and to whom it was to be traded. Ex. 120 (pp. 24-26, 30, 37-38); 282. ==========================================START OF PAGE 10====== On two occasions, Rogers placed wash trades between his own accounts. On January 25, 1990, Rogers sold 12,000 shares of JML stock at $6.375 per share from his H. Beck account, and bought 12,000 shares of JML stock at $6.375 per share for his First Potomac account. Similarly, on February 12, 1990, Rogers sold 12,000 shares of JML stock at $5.625 per share from his First Potomac account and bought 12,000 shares of JML stock at $5.625 per share for his Voss & Co. account. Ex. 2. Broumas also traded JML stock through nominee accounts in the names of Matthew Johnson, Michael Connolly, and Kevin Lemmon. During the period from November 1989 to May 1990, Broumas placed 12 matched orders through Johnson's account at H. Beck. Ex. 2, 6. During the period from February 1989 to April 1989, Broumas placed four matched orders through an account Johnson maintained at Swan Securities. Ex. 2, 6; Dec. Tr. 252-253 (Johnson). Michael J. Connolly ("Connolly") was employed by Madison of Virginia during the relevant period as a vice president and cashier. In the fall of 1989, Broumas told Connolly that he was using these transactions to generate cash to pay maturing bank notes. Connolly understood that Broumas used these trades in his margin accounts to obtain a float, or use of the funds, for several days. Ex. 249. Connolly opened an account with Mr. Chema at H. Beck. Although Connolly agreed to allow Broumas to conduct trades through Connolly's account, he never subsequently signed any documents giving Broumas authority to trade on his behalf, or had any dealings with the broker again. Dec. Tr. 269 ==========================================START OF PAGE 11====== (Connolly); Ex. 249. Between January 1990 and May 1990, Broumas placed nine matched orders in JML Class A stock through Connolly's H. Beck account. Kevin K. Lemmon ("Lemmon") was employed by Madison of Virginia during the trading period as a vice president in the lending department. Between December 1989 and May 1990, Lemmon maintained accounts at First Potomac and H. Beck through which he allowed Broumas to place 14 matched orders in JML Class A stock. Ex. 2, 6. None of Broumas's wash trades and matched orders placed between January 1, 1989 and July 2, 1989 were reported by the registered representatives and broker-dealers who executed Broumas's trades, in violation of the requirements of NASD Schedule G. Ex. 2, 4, 310. In addition, many trades after July 3, 1989 were not reported either, again in violation of NASD Schedule G. Ex. 2, 4. From January 1, 1989 to June 30, 1990, the trading period at issue, all of Broumas's reported trades constituted 40.3% of the total reported market volume for JML Class A stock. From July 1, 1989 to December 31, 1989, all of Broumas's reported trades constituted 55.3% of the total reported market volume for JML Class A stock during that time period. From July 1, 1989 to June 30, 1990, all of Broumas's reported trades constituted 48.2% of the total reported market volume for JML Class A stock during that time period. Ex. 8, 304, 306; Dec. Tr. 61-69 (Boeggeman). With regard to only the volume of Broumas's wash trades and matched orders reported, from January 1, 1989 to June 30, 1990, ==========================================START OF PAGE 12====== all of Broumas's reported wash trades and matched orders constituted 36.6% of the total reported market volume for JML Class A stock. From July 1, 1989 to December 31, 1989, all of Broumas's reported wash trades and matched orders constituted 53.5% of the total reported market volume for JML Class A stock during that time period. From July 1, 1989 to June 30, 1990, all of Broumas's reported wash trades and matched orders constituted 44.1% of the total reported market volume for JML Class A stock during that time period. Ex. 4, 8, 304, 306; Dec. Tr. 61-69 (Boeggeman). Finally, comparing the total volume of wash trades and matched orders reported with the total volume reported only on those days on which reported wash trades and matched orders occurred, from January 1, 1989 to June 30, 1990, Broumas's trades constituted 73.7% of the reported market volume for JML Class A stock. From July 1, 1989 to December 31, 1989, the applicable percentage is 72.4%. From July 1, 1989 to June 30, 1990, the percentage was 73.7%. Ex. 4, 8, 304, 306; Dec. Tr. 61-69 (Boeggeman). In an attempt to support the price of JML stock, Broumas also engaged in the practice of marking-the-close, "the practice of executing the last transaction of the day in a particular security in order to affect its closing price." Richard L. Warner, 53 SEC Docket 0377, 0379 (1992). It is a series of transactions, at or near the close of the trading day, i.e., at or within minutes of 4:00 p.m., which either uptick or downtick a security. Dec. Tr. 342, 356 (Savarese). Marking-the-close ==========================================START OF PAGE 13====== represents a possible departure from the normal forces of supply and demand that result in the fair auction price for a security, and is of concern to those who regulate the markets. Dec. Tr. 356-357 (Savarese). Between January 18, 1989 and June 25, 1990, Broumas ordered 64 purchases that occurred within the final ten minutes of the trading day; of these, 54 constituted the last trade of the day; and 47 of these purchases were executed on an uptick. Ex. 3, 7; Dec. Tr. 208 (Broumas). In marking-the-close, registered representatives executed Broumas's purchases on either the AMEX or the Midwest Stock Exchange. By using the exchanges, Broumas could assure that his closing purchases would be reported by the exchanges, the reporting services, and the newspapers. Broumas primarily placed his late-day purchases through accounts held at Scott & Stringfellow and H. Beck. Ex. 3, 7. Broumas typically bought 100-200 shares of JML stock at or near the close of the trading day. On a number of occasions, Broumas's trades raised the closing price of JML stock by 1/8. Ex. 3, 7. During this time period, he followed the price of JML Class A stock in the newspaper daily. Dec. Tr. 207 (Broumas). Purchases at the close are especially significant for two reasons. First, brokerage firms use the closing price of a security to arrive at their margin calculations in determining what their margin requirements will be for customers. Generally, many firms require maintenance of equity of 35% in margin accounts. Some firms also use $5.00 per share as a level at ==========================================START OF PAGE 14====== which they raise margin requirements. Other firms use a lower price. When the stock price reaches that level, many firms raise their requirements in margin accounts to 100% equity, essentially requiring full cash payment for the security. Second, the closing price of a security is the price reflected in the newspapers as the final price for that security for that trading session. Dec. Tr. 357-359 (Savarese). The concern about marking-the-close arises when the practice is repeated, is ongoing, and develops into a pattern. Dec. Tr. 358 (Savarese). At some point, Adrian C. Havill ("Havill"), a respondent in a companion proceeding (Admin. Proc. File No. 3-8510), told Broumas that his office said that Havill could not take these uptick trades any longer. Havill told him the trading was not proper, and that it might affect the market. Dec. Tr. 207-208 (Broumas). Broumas conducted some of his marking-the-close trades through two accounts at Scott & Stringfellow, which he opened in late August 1989. Ex. 7; Dec. Tr. 288-289 (Havill). Broumas's purpose in conducting these marking-the-close trades was to create interest in the stock. He knew that if nobody bought the stock on a certain day, it would not show up in the newspaper listings the next day. Dec. Tr. 292-294 (Havill). At Scott & Stringfellow, in particular, Broumas would often call and execute trades near the end of the day. If the stock had not traded that day, Broumas bought some shares just to make sure it traded. Dec. Tr. 295-296 (Havill). Broumas would call many times between 3:00 and 4:00 p.m. and instruct Havill, his ==========================================START OF PAGE 15====== registered representative at Scott & Stringfellow, to buy at or near the close. Dec. Tr. 300 (Havill). In 1990, AMEX conducted a study concerning certain trading activity in JML Class A stock, which was then traded on the AMEX. Dec. Tr. 341-342 (Savarese). The study was initiated by the AMEX Equities Surveillance Department in January 1990 when a Participant-at-the-Close Report, which highlights patterns of either upticks or downticks over a period of time in any security, showed a pattern of upticks at or near the close of trading for JML Class A stock. Dec. Tr. 341-342 (Savarese); Ex. 300. The Participant-at-the-Close Report had revealed that, on 9 out of 10 trading days from December 29, 1989 through January 12, 1990, JML closed on a plus or zero plus tick,-[5]- and that Scott & Stringfellow had effected the last purchase of the day on 8 of the 9 days. Seven of the 8 were executed in the last 5 minutes of trading. All of the firm's at-the-close purchases were for 100 shares and were done on plus or zero plus ticks. Ex. 300 (8/17/90 memo). The study was extended to encompass the time period August 30, 1989 through January 17, 1990. The study concluded that, of the 39 trading sessions during which Broumas was active at Scott & Stringfellow, he executed the last trade of the day on 32 occasions and the trade was effected on a 1/8 uptick on 27 occasions. Ex. 300 (8/17/90 memo). In September -[5]- A zero plus tick is a purchase executed for the same price as the previously executed trade where that trade was executed for a price higher than the immediately preceding trade. ==========================================START OF PAGE 16====== 1989, Broumas ordered 15 wash trade transactions, and 11 marking- the-close trades, 9 of which were on the same days as the wash trades. In December 1989, Broumas ordered 11 wash trades or matched order transactions, and 9 marking-the-close trades, 4 of which were on the same days as the wash trades. The pattern continued throughout the trading period. Ex. 2, 3. Broumas's Violations Market manipulation refers generally to practices--such as wash sales, matched orders or rigged prices--that are intended to mislead investors by artificially affecting market activity. Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 6 (1985). Manipulation subverts the objectives of the Exchange Act which, among other things, are intended to "insure the maintenance of fair and honest markets,"--that is, "markets where prices may be established by the free and honest balancing of investment demand with investment supply." H.R. Rep. No. 1383, 73d Cong., 2nd Sess. (1934) at 11. Section 9(a)(2) of the Exchange Act, which prohibits the manipulation of securities listed for trading on a national exchange, makes it unlawful for a person to engage in a series of transactions that create actual or apparent activity or raise or depress a stock's price when done for the purpose of inducing others to buy or sell the security. Section 9(a)(2) was considered by Congress to be "the very heart" of the Exchange Act, and "its purpose was to `outlaw every device used to persuade the public that activity in a security is the reflection of a genuine demand instead of a mirage.'" Crane Co. v. ==========================================START OF PAGE 17====== Westinghouse Air Brake Co., 419 F.2d 787, 794 (2d Cir. 1969) (quoting 3 L. Loss, Securities Regulation 1549-55 (2d ed. 1961)), cert. denied, 400 U.S. 822 (1970). Section 9(a)(2) violations are established by a showing that an individual: 1) effected a series of transactions in a security registered on a national securities exchange; 2) which created actual or apparent active trading in such security, or raised or depressed the price of the security; 3) for the purpose of inducing the purchase or sale of the security by others. Crane at 794-795; Section 9(a)(2) of the Exchange Act. Section 9(a)(1) prohibits certain manipulative practices, including wash trades and matched orders, when such transactions are done for the purpose of creating the false or misleading appearance of active trading in a security listed on a national securities exchange, or a false or misleading appearance with respect to the market for any such security. To establish a violation of Section 9(a)(1), it must be shown, as it has been in this case, that one or more individuals effected a transaction in a "security registered on a national securities exchange ... which involve[d] no change in the beneficial ownership thereof, or ... with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties." Section 9(a)(1) of the Exchange Act. It also must be established, as it has in this matter, that the ==========================================START OF PAGE 18====== transaction was done "for the purpose of creating a false or misleading appearance of active trading in" such security, "or a false or misleading appearance with respect to the market" for any such security. Section 9(a)(1) of the Exchange Act; see Michael Batterman, 46 S.E.C. 304, 305 (1976). The manipulative activities expressly prohibited by Sections 9(a)(1) and 9(a)(2) of the Exchange Act with respect to a listed security constitute violations of Section 10(b) of the Exchange Act and Rule 10b-5 when such activities involve trading in the over-the-counter market. See, e.g., United States v. Charnay, 537 F.2d 341, 350-51 (9th Cir. 1976), cert. denied, 429 U.S. 1000 (1976); SEC v. Resch-Cassin & Co., Inc., 362 F. Supp. 964, 975 (S.D.N.Y. 1973); Edward J. Mawod & Co., 46 S.E.C. 865, 869-71 (1977), aff'd, Mawod & Co. v. SEC, 591 F.2d 588 (10th Cir. 1979); Batterman, 46 S.E.C. at 305; Russell Maguire & Co., Inc., 10 S.E.C. 332, 347-49 (1941). To establish that an individual has engaged in manipulative practices in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Division must prove, as it has done here, that one or more individuals engaged in any act, practice, or course of business which operated as a fraud or deceit upon any person in connection with the purchase or sale of the security. See SEC v. Kimmes, 799 F. Supp. 852, 858 (N.D.Ill. 1992). In establishing a violation of Section 10(b) and Rule 10b-5, the Commission must show that the individual acted with scienter. Aaron v. SEC, 446 U.S. 680, 701-02 (1980). ==========================================START OF PAGE 19====== "Rule 10b-5 . . . require[s] no additional proof of facts creating a higher burden of proof when compared to subsections 9(a)(1), (2) and (6). In fact, Rule 10b-5 create[s] a lower burden of proof." Chemetron Corp. v. Business Funds, Inc., 682 F.2d 1149, 1165 (5th Cir. 1982), reh'g denied, 689 F.2d 190 (5th Cir. 1982), vacated, remanded, 460 U.S. 1007 (1983), on remand, 718 F.2d 725, cert. denied, 460 U.S. 1013 (1983). The third element required under Section 9(a)(2)-- manipulative purpose--is not required to establish a violation of Section 10(b) and Rule 10b-5. Instead, "[i]t is sufficient for the person to engage in a course of business which operates as a fraud or deceit as to the nature of the market for the security." Batterman, 46 S.E.C. at 305; see also Charnay, 537 F.2d at 350- 51. Such deceit has been demonstrated in this case. From January 1, 1989 to June 30, 1990, Broumas repeatedly placed orders for wash trades and matched orders in JML Class A stock, which constituted manipulative practices in violation of Sections 9(a)(1) and 9(a)(2) of the Exchange Act. Furthermore, this pattern of conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because, by creating a false or misleading appearance of active trading in JML Class A stock, it operated as a fraud or deceit upon the marketplace. Broumas's wash trades and matched orders violated Sections 9(a)(1) and 9(a)(2) of the Exchange Act. Sections 9(a)(1) and 9(a)(2) require that the proscribed activities be engaged in with the requisite manipulative intent. Transactions which violate ==========================================START OF PAGE 20====== Section 9(a)(1) can serve as the basis for a violation of Section 9(a)(2). Michael J. Meehan, 2 S.E.C. 588, 615-618 (1937). However, transactions such as wash sales and matched orders, as are present in this case, which constitute violations of Section 9(a)(1), have been held to be per se manipulative. Further, it has been erroneously argued that the stock manipulation must occur through a national exchange. My reading of Section 9(a)(1) merely requires that the stock be listed on the national exchange (American Stock Exchange in this case), not that manipulation occur through the Exchange. See Mawod & Co., 591 F.2d at 595-96. Respondent argues that there is unequivocal proof that Section 9(a)(1) of the Exchange Act was not violated by the Respondent. RPFF p. 23. In support of this argument Respondent states in substance that there was no intent to manipulate the market and that a substantial number of the wash sales were unreported and could not have impacted market prices and those that were reported did not impact prices. I disagree. Broumas subverted the normal dynamics of the market by trades that were fictitious on the one hand since he was trading with himself and on the other hand were real since he was using the float to obtain money as if it was a genuine sale. It is considered that investors have the right to assume that security trades are authentic with a dynamic impact on prices and not a device to obtain money from the float through wash sales. With respect to the argument that much of the trades were not reported, the Commission noted in Mawod & Co. that formal reporting is not an ==========================================START OF PAGE 21====== essential ingredient in a wash sale violation: In the over the counter markets there was no tape. And until the National Association of Securities Dealers, Inc. developed the automated quotation system known as NASDAQ, trading volume was normally something that even an astute professional could only guess at .... But the brokers and dealers through whom orders in a particular issue funnel know whether it is active or inactive. And when it is active that information filters out to investors.-[6]- Mawod & Co., 46 S.E.C. at 870 n. 24. Respondent also argues that neither Respondent nor Broumas ever requested that the wash sales be reported to AMEX and that one must conclude that there was never any manipulative intent in violation of Sections 9(a)(1), 10(b) and Rule 10b-5. RPFF p. 27. Assuming arguendo the factual correctness of this claim, I disagree with the conclusion. In order to obtain funds from the float, Broumas had to manipulate the market using the wash sale device. It is not considered that the price in a wash sale is genuine, as contemplated by the securities market, since it was between the same person without any competitive pressures. This contrived manipulated price was used to obtain money from a float. The wash sale device that was used to manipulate the price is, under the facts of this case, proscribed by Sections 9(a)(1), 10(b) and Rule 10b-5 of the Exchange Act. Accepting arguendo Respondent's argument that specific intent is required, the record here clearly establishes specific intent every time -[6]- I disagree with Respondent that Mawod is inapplicable because it deals with a different market. It is considered that there is a considerable network effect operating for unreported trades for all of the large markets. ==========================================START OF PAGE 22====== Broumas used the wash sale with assistance of the Respondent. Additionally, I found that of the 61 trades in issue, 31 trades were reported - 25 by Haynes. This amounted to 258,884 shares of JML class A stock. The volume reported in the newspaper represented largely hidden wash sales and an investor would be beguiled into thinking that there was substantial activity in the market when in fact there was little. The harm to an investor seeking an active market in JML stock is obvious. In other instances, the Commission has recognized that, absent an admission, an inference of manipulative intent may be drawn and a prima facie case shown when a person with substantial pecuniary interest in achieving a price change engages in the type of market activity proscribed by Sections 9(a)(1) and 9(a)(2) of the Exchange Act. Batterman, 46 S.E.C. at 305; Halsey, Stuart & Co., Inc., 30 S.E.C. 106, 123-24 (1949); The Federal Corp., 25 S.E.C. 227, 230 (1947). This is exactly what happened in the instant case. Broumas's pattern of placing wash trades and matched orders in JML Class A stock constituted a manipulative practice per se under Section 9(a)(1) of the Exchange Act because it created the false or misleading appearance of active trading in JML Class A stock, and a false or misleading appearance with respect to the market for JML Class A stock. This pattern of conduct also violated Section 9(a)(2) of the Exchange Act because Broumas's purchases and sales created the false and misleading appearance of active trading in JML Class A stock. Broumas's motive can be ==========================================START OF PAGE 23====== inferred from the fact that he engaged in an extensive and repeated pattern of placing wash trades and matched orders while having a clear and substantial financial interest in raising or depressing the price of JML Class A stock. Broumas admitted that he faced margin calls if the price of JML Class A stock dropped significantly. He also admitted that he engaged in the pattern of wash trades and matched orders to take advantage of the "float," i.e., he obtained the use of the proceeds generated by a "sale" immediately while not being required to pay for the corresponding "purchase" until seven days later. During the eighteen month period in question, Broumas arranged for a total of 484 violative trades in JML Class A stock. See Thornton & Co., 28 S.E.C. 208, 222-225, 224 n.21 (1948). The respondent in Thornton used sales tickets for collateral. The Commission found that the purpose of the trade was to create a false and misleading impression of active trading in violation of Sections 9(a)(1) and 9(a)(2) of the Exchange Act. As Thornton indicates, "Purchasers in over-the-counter as well as the Exchange market are entitled to believe that the Exchange market price which governed the price charged them represents a price established in an independent market free of artificial devices." Id. at 224. This would by implication require that all transactions be reported and be subject to, as well as effect, the competitive market. Here the failure to report in many instances and the fixing of the prices subverted operation of a free marketplace. Further, the parties who loaned money on margin were defrauded as ==========================================START OF PAGE 24====== Broumas engaged in a charade pretending that there were genuine trades at a price set competitively. Whatever other motives he might have had, Broumas must be deemed reasonably to have anticipated what would follow from his activity. As indicated, Broumas's wash trades and matched orders had a significant effect on the reported volume during the relevant period. Furthermore, the sheer number of wash trades and matched orders placed by Broumas in JML Class A stock over an eighteen month period, combined with his use of numerous brokers and nominee accounts, clearly leads to the conclusion that Broumas effected a series of transactions in JML Class A stock, creating apparent active trading in that stock for the purpose of inducing others to buy the stock. See Meehan, 2 S.E.C. at 615- 618. "[A]ctivities [constituting wash sales and matched orders under Section 9(a)(1)] in connection with the purchase or sale of any security operate as a fraud or deceit upon any person and are prohibited by Section 10(b) of the Exchange Act and Rule 10b-5 thereunder." Batterman, 46 S.E.C. at 305. The Commission has held that elements of proof under Section 10(b) and Rule 10b-5 are different from those under Sections 9(a)(1) and 9(a)(2). Unlike Sections 9(a)(1) and 9(a)(2), no showing of manipulative purpose is required to establish a violation of Section 10(b) and Rule 10b-5. "It is sufficient for the person to engage in a course of business which operates as a fraud or deceit as to the nature of the market for the security." Id. at 305 (emphasis added). ==========================================START OF PAGE 25====== Broumas's pattern of placing orders for wash trades and matched orders in JML Class A stock clearly operated as a fraud or deceit upon the investing public by creating the false and misleading appearance of activity in the stock. The investing public is led to believe that the volume in a given stock--as reported in the newspaper--reflects genuine supply and demand for that security. The investing public is deceived when, as here, during an eighteen month trading period, at least 36.6% of the total reported volume in a particular security represents a complete fiction in that there was absolutely no change in beneficial ownership of that stock. The use of nominee accounts in which to conduct such manipulative trading--especially when third party trading authority was lacking--is not genuine demand. United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972); SEC v. Commonwealth Securities, Inc., 410 F. Supp. 1002, 1009-1012 (S.D.N.Y. 1976), aff'd in part, modified in part, and remanded, 574 F.2d 90 (2d Cir. 1978); Mawod & Co., 46 S.E.C. at 871-72. That practice in and of itself is deceptive. To establish a violation of Section 10(b) of the Exchange Act, it must be proved that Broumas acted with scienter. Scienter has been defined by the Supreme Court as a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). The Commission and most circuit courts, however, have held that recklessness will suffice. See e.g., Mawod & Co., 591 F.2d at 595-96; Michael Joseph Boylan, 47 S.E.C. 680, 687 (1981). The usual formulation ==========================================START OF PAGE 26====== of recklessness cited by the courts is set forth in Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977): Reckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers and sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Id. at 1045. The record reflects such highly unreasonable omissions on the part of the Respondent. Respondent argues that she had no actual knowledge of the fraud. However, proof of scienter in manipulation cases need not be direct, but rather may be inferred from circumstantial evidence, including evidence of price movement, trading activity, and other factors. See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91 n.30 (1983); Santa Fe Industries v. Green, 430 U.S. 462, 475 (1977); Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir 1986); Mawod & Co., 591 F.2d at 596. Further, proof of manipulation is generally not based on a single activity, but rather on a course of conduct showing an intentional interference with the normal functioning of the market for a security. Indeed, manipulation is usually the result of acts, practices, and courses of conduct that deceive the marketplace: Proof of a manipulation almost always depends on inferences drawn from a mass of factual data. Findings must be gleaned from patterns of behavior, from apparent irregularities, and from trading data. When all of these are considered together, they can emerge as ingredients in a manipulative scheme designed to tamper with free market forces. ==========================================START OF PAGE 27====== Pagel, Inc., 48 S.E.C. 223, 226 (1985) (emphasis added). Moreover, it is not necessary to rely on direct evidence that Broumas willfully manipulated the market. Instead, I may rely on inferences drawn from the evidence adduced at the hearing to reach the conclusion that an illegal manipulation occurred. Collins Securities Corp. v. SEC, 562 F.2d 820, 822-23 (D.C. Cir. 1977). Broumas had a pecuniary interest in the manipulation for several reasons: he was a director of JML and chairman of the board of Madison of Virginia; he held JML Class A stock on margin in numerous accounts, including nominee accounts; and he was heavily in debt. In addition, by placing wash trades and matched orders, Broumas engaged in a pattern of trading which is clearly proscribed by Sections 9(a)(1) and 9(a)(2), and which operated as a fraud or deceit on the marketplace by creating the false and misleading appearance of active trading in JML stock. Broumas engaged in this conduct either intentionally or recklessly. Broumas repeatedly engaged in a pattern of activity designed to mark-the-close in JML Class A stock. By placing a series of transactions in JML Class A stock which marked-the-close, Broumas violated Section 9(a)(2) of the Exchange Act because this pattern of trading artificially raised or supported the market price of JML Class A stock at the close. Furthermore, this pattern of conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because the repeated purchases--executed on an uptick, or a zero plus tick--at or near the end of the trading day had ==========================================START OF PAGE 28====== the effect of increasing or supporting the closing price of JML Class A stock on those days. The Commission has held that the practice of placing orders at or near the end of the day in order to cause the stock to close at an uptick violates Section 9(a)(2) of the Exchange Act. Jacob Schaefer, 12 SEC Docket 1128, 1129 (1977). As stated above, in order to prove that Broumas violated Section 9(a)(2) by placing marking-the-close trades, it must be proved that he did so for the purpose of inducing the purchase or sale of the security by others. Absent an admission, manipulative intent may be inferred from circumstantial evidence. Although there is plentiful evidence from which such intent might be inferred, I need not rely upon a mere inference; Broumas clearly stated to Mr. Havill that at least one of his motives for placing the late day trades was "to create some interest in the stock because if nobody buys it on a certain day, it doesn't show up in the listing in the paper." He went on to tell Mr. Havill that he didn't want investors to forget that the bank was around, "so he was just trying to stir up a little interest in the stock." Dec. Tr. 293 (Havill). The practice of marking-the-close also constitutes a violation of Section 10(b) and Rule 10b-5 of the Exchange Act. See e.g., Stein, 456 F.2d 844 (2d Cir. 1982) (artificial shoring up of the price through purchases of 100 share round lots, often at the end of the day, on a "plus tick" at various brokers and in the names of various nominees). Broumas's pattern of marking- ==========================================START OF PAGE 29====== the-close injected into the marketplace an artificial price for JML Class A stock, thus operating as a fraud or deceit on the investing public. Information concerning a manipulation and the artificiality of the market price is material information the public is entitled to know. Given that the Commission has specifically recognized the impropriety of the practice of marking-the-close when done to avoid or reduce margin calls, it is considered that Broumas acted with scienter. Andrew Doherty, 49 SEC Docket 0859, 0861 (1991).-[7]- Respondent Haynes Haynes's Background Carole L. Haynes is the owner and president of First Potomac. Answer I.A. She has been licensed by the National Association of Securities Dealers ("NASD") since 1977. Answer I.A. Haynes has a Bachelor's Degree in Business Administration from George Mason University and a Master's Degree in Business Administration from American University. Tr. 10-11 (Haynes). Currently, in addition to her brokerage business, Haynes does tax preparation and other accounting work. Tr. 11 (Haynes). Haynes has taken additional accounting and tax courses, and earlier in her career was an agent enrolled to practice before the Internal Revenue Service. Tr. 11 (Haynes). In the securities field, Haynes passed examinations to be a Registered Principal, Financial Principal, and Options Principal entitling her to -[7]-There is no contention that the Respondent participated or aided or abetted Broumas in marking-the-close transactions. ==========================================START OF PAGE 30====== engage in supervisory responsibilities at a broker-dealer. Tr. 12 (Haynes). Haynes's first position in the securities field was as an employee of the NASD, where she worked from 1970 to 1977. Three years into her employment, she became an examiner. Tr. 14 (Haynes). Haynes's duties as an examiner at the NASD were to investigate customer complaints, conduct routine examinations of broker-dealers for compliance with SEC and NASD rules, and to test broker-dealers for financial and operational soundness. Tr. 14-15 (Haynes). While at the NASD, Haynes examined broker- dealers in the Washington, D.C. area, initially as part of a small team, and then subsequently by herself. Tr. 15 (Haynes). Eventually she became a senior examiner and trained more junior examiners. Tr. 16 (Haynes). Interrelationship and History with Respondents In Related Administrative Proceedings In 1977, Haynes left the NASD to take employment at Voss & Co., Inc. ("Voss & Co."), a registered broker-dealer. Tr. 16 (Haynes); Ex. 1106-B.-[8]- At Voss & Co., Haynes was involved in the operations, compliance, and financial aspects of the business as well as being a registered representative for some accounts. Tr. 16-18 (Haynes). When Haynes worked at Voss & Co., Stephen C. Voss ("Voss"), a respondent in one of the related -[8]- Haynes claimed that Stephen Voss, the president of Voss & Co., hired her because, as an NASD examiner, she had filed too many complaints against Voss & Co., and Voss thought that hiring her was the only way to stop it. Tr. 16-17 (Haynes). ==========================================START OF PAGE 31====== Commission administrative proceedings (Admin. Proc. File No. 3- 8511), owned the firm. Tr. 17 (Haynes). From 1977 until March 1979, during Haynes's employment at Voss & Co., Richard M. Kulak ("Kulak"), a respondent in another of the related Commission administrative proceedings (Admin. Proc. File No. 3-8509), was also employed at Voss & Co. Tr. 17-18 (Haynes); Ex. 1106-B. Between 1977 and 1981, Haynes was the principle compliance officer at Voss & Co. Tr. 18-19 (Haynes). While at Voss & Co., Haynes, together with Kulak and Voss, was the subject of a 1979 disciplinary action brought by the NASD and fined $500. Ex. 700, 703. In mid-1982, Haynes left Voss & Co., and became employed at Lara, Millard & Associates, Inc. ("Lara Millard") as a registered representative and securities principal. Tr. 19-21 (Haynes); Ex. 1106-B. Lara Millard was a respondent in another of the related Commission administrative proceedings (Admin. Proc. File No. 3- 8509).-[9]- Herbert Millard ("Millard") and Ronald Lara ("Lara"), founders of Lara Millard, had previously run a branch office for Voss & Co., and decided to start their own broker- dealer. Haynes had also worked with Millard at the NASD. Tr. 20, 31-32 (Haynes). Today Millard works for Haynes. He started to work for Haynes at First Potomac in September 1990, immediately after he left Lara Millard. Tr. 31-33 (Haynes). -[9]- Most of the respondents charged in companion proceedings appeared to have worked together in some capacity. It seems likely that they knew that Broumas was fraudulently manipulating the market with their conscious aid and assistance. ==========================================START OF PAGE 32====== Kulak, who had been with Haynes at Voss & Co., also worked with her at Lara Millard from 1983 to 1984. Tr. 29-30 (Haynes). In September 1984, Haynes left Lara Millard to start her own broker-dealer, First Potomac Securities ("First Potomac Securities"). Tr. 20-21 (Haynes); Ex. 1106-B. At First Potomac Securities, Haynes performed and supervised all major duties - compliance, financial and operations. Tr. 22 (Haynes). From September 1986 until October 1987, Richard Chema ("Chema") worked for Haynes at First Potomac Securities. Chema is also a respondent in one of the related Commission administrative proceedings (Admin. Proc. File No. 3-8508). Tr. 22, 25, 30-31 (Haynes); Ex. 1106-B. In October 1987, as a result of a net capital problem caused by the stock market crash and a commodities customer, Haynes and First Potomac Securities went out of business. At the time First Potomac Securities closed, Haynes employed 19 registered representatives. Tr. 22-24 (Haynes). Haynes then became the branch manager and a registered representative for another broker-dealer, Swan Securities, in Falls Church, Virginia, commencing in November 1987. Tr. 24 (Haynes); Ex. 1106-B. In approximately September 1988, Swan Securities merged with another firm and changed its name to Carey Jamison. Haynes worked at Swan Securities/Carey Jamison until March 1989. Tr. 25 (Haynes). Haynes again formed her own brokerage firm, First Potomac, which became operational in May 1989. Tr. 26 (Haynes). From February 1988 to February 1992, Haynes was married to Dwight Dunton ("Dunton"), who worked for ==========================================START OF PAGE 33====== First Potomac and provided the initial financing for the firm. They became separated six months before their divorce. Tr. 27 (Haynes). It was at First Potomac that the conduct that is the subject of this proceeding occurred. Haynes's Role at First Potomac In 1989 and 1990, First Potomac employed approximately four registered representatives, including Haynes and Dunton. The employees worked close together, and Dunton and Haynes could overhear the other's conversations. Tr. 252-253 (Dunton). As the compliance officer at First Potomac, Haynes reviewed order tickets daily, and initialed them. She approved every other registered representative's trades, including Dunton's. No one approved her order tickets. Tr. 67-68 (Haynes). Haynes had knowledge of every transaction at the firm, either immediately if she executed it or shortly thereafter if executed by someone else. Tr. 68 (Haynes). Haynes has always been the president of First Potomac, and a securities principal. From May 1989 through June 1990, she also acted as the registered representative for some accounts, which she called house accounts. She has always been in charge of compliance at the firm. Tr. 28-29 (Haynes). In 1989 and 1990, First Potomac cleared its securities transactions through another broker-dealer.-[10]- Tr. 75- 76 (Haynes). -[10]- Respondent alleges (RPFF p. 20) that the clearing house arrangement assured compliance with Regulation T and margin requirements, citing to Tr. 75-76. I fail to see that the portions of the transcript cited establish these points. ==========================================START OF PAGE 34====== Haynes's Relation with John Broumas Haynes has known John Broumas since 1978 or 1979. She first heard his name at Voss & Co., when Kulak was at the firm. Broumas was Kulak's customer. Tr. 33-34 (Haynes). When Kulak left Voss & Co. in 1979, Haynes became one of the people who took Broumas's orders over the telephone. Tr. 33-34 (Haynes). When she left Voss & Co. and started at Lara Millard, Broumas sought her out and opened an account with her, in approximately September 1982. Tr. 34 (Haynes). Haynes believed that Broumas opened a new account with her, and maintained his existing account at Voss & Co. Tr. 38-40 (Haynes).-[11]- Broumas originally opened one account at Lara Millard, which was a joint account with his wife in the name of John and Ruth Broumas. Tr. 35 (Haynes). Haynes knew that between January 1989 and July 1990, Broumas maintained this account at Lara Millard.-[12]- Tr. 38-40 (Haynes). At the time Haynes was Broumas's registered representative, she knew much about Broumas's personal affairs. She knew that he had owned movie theaters, and subsequently bought into McLean Bank, gradually becoming more and more involved with the bank's operations. Tr. -[11]- Respondent argues that her testimony reflects that the Voss account was closed. RPFF p. 20; Tr. 40. However, the transcript (p. 40) reflects that there was probably an overlap where both Voss & Co. and First Potomac had a Broumas account. -[12]- Respondent argues (RPFF p. 20; Tr. 39-40) that Haynes knew Broumas closed his account at Lara Millard sometime in 1987. This contention does not coincide with Respondent's investigatory testimony. Tr. 39. Accordingly, I am unable to credit Respondent's argument. ==========================================START OF PAGE 35====== 40-41 (Haynes). Before 1988, Haynes knew that Broumas eventually became chairman of the board of McLean Bank; that McLean Bank was purchased by James Madison, Limited; and that its name changed to Madison National Bank of Virginia. Tr. 41 (Haynes). Haynes knew in 1988 that Broumas was chairman of the board and president of Madison of Virginia, and on the board of directors of James Madison, Limited. Tr. 41-42 (Haynes). Broumas received a large block of JML Class A stock as a result of the JML buy out of McLean Bank in 1987, and he delivered much of it into his account with Haynes. Haynes assumed that Broumas was a multi-millionaire. Tr. 43-45 (Haynes). During this time period, before 1989, Haynes spoke to Broumas a couple of times each week, when he would call for a trade or to find out a stock quote, and Broumas told her these facts as they were occurring. Tr. 42 (Haynes). These events had occurred by 1988, and by that time Broumas had sold many of his movie theaters. Tr. 42 (Haynes). In October 1987, Broumas's joint account at First Potomac Securities had 131,000 shares of JML Class A stock, which were traded on the AMEX. Tr. 45-46 (Haynes). Haynes believed that Broumas's financial problems began in late 1988, perhaps 1989. Tr. 43 (Haynes). Broumas told Haynes, probably in 1988, that he had co-signed a note for a friend, Charlie Schools, for a project. She believed the amount was $2 million and that the note was owed to Madison National Bank. Mr. Schools defaulted on the note, and Broumas then owed approximately $300,000 a year in ==========================================START OF PAGE 36====== interest on the loans. Tr. 47-49 (Haynes). Haynes believed at the time that Broumas's income was $100,000 to $150,000 per year. Tr. 48 (Haynes). Haynes believed that Broumas's cash flow problems and the loan payments resulting from the default on the loan likely began sometime in 1988. Tr. 49 (Haynes). In conversations in late 1988 or 1989, Broumas told Haynes that he needed to make the interest payments to save face, and to maintain his prestige and his directorship at the bank. Tr. 49, 51 (Haynes). As a result of the October 1987 market crash, Haynes believed that Broumas lost $1.5 million in Syntec stock which he owned. Tr. pp. 37-38, 49-50 (Haynes). In addition to losing money on the Syntec stock, and his liability for interest payments on the note, Broumas was affected by the real estate collapse of the late-1980's. Tr. 50 (Haynes). When Haynes opened First Potomac Securities in September 1984, she contacted Broumas and he opened an account there in November 1984. Tr. 35- 36 (Haynes). As stated, Broumas initially opened a joint account with his wife. Then, in December 1985, he opened a second account, titled "Les Girls," and that account's paperwork indicated that it was a partnership between Broumas's wife and daughter. Tr. 36 (Haynes). Broumas told Haynes that the money for that account had come from an inheritance. Tr. 36-37 (Haynes). However, Broumas at all times directed all of the trading in the Les Girls account, and his wife and daughter never did any trading in that account. Tr. 37 (Haynes). Haynes considered the Les Girls ==========================================START OF PAGE 37====== account to be Broumas's account. She did not consider the account a nominee account, even though Broumas's name was not on it, because the true nature of the account was fully disclosed to her. Tr. 343-344 (Haynes). When First Potomac Securities ceased doing business in October 1987, and Haynes went to work for Swan Securities, both of Broumas's accounts transferred with her. Tr. 40 (Haynes). Sometime in July 1988, while Haynes was at Swan/Carey Jamison, Broumas opened a third account, BC Theatres, with her. Broumas told her that this was a partnership between Broumas and one of his partners that owned the remaining theaters. Tr. 43-44 (Haynes). Broumas controlled the BC Theatres account and did all of the trading in it. Tr. 43-44 (Haynes). When Haynes started First Potomac Investment Services in May 1989, she transferred the three Broumas accounts (joint account, Les Girls and BC Theatres) to the new firm. Tr. 40-53 (Haynes). All of Broumas's accounts at First Potomac were margin accounts. Tr. 62 (Haynes). Haynes considered all three accounts to be Broumas's accounts and controlled by him. Tr. 344-345 (Haynes). Broumas ordered every trade in all three accounts. Tr. 343-345 (Haynes). Since 1984, Broumas had performed five or six trades per month with Haynes, regardless of the stock he was trading. She claimed that all of the trading was dictated by Broumas's cash flow needs, and that there was never any logic to his trading. Tr. 69-70 (Haynes). In the years prior to 1989, Broumas had traded numerous types of securities in his accounts with Haynes. Tr. 70-71 (Haynes). ==========================================START OF PAGE 38====== Accordingly, it appears very doubtful, given Haynes's extensive background in securities, that she did not know and did not actively assist in Broumas's scheme to manipulate the stocks. Prior to 1989, Haynes believed that she had most of Broumas's JML Class A stock holdings. Tr. 73-74 (Haynes). After the buy out, Broumas delivered approximately 150,000 shares of JML Class A stock into his accounts with Haynes. In May 1989, Broumas still had 105,000 shares at First Potomac, with a market value between $6 and $7 per share. Tr. 73 (Haynes). In 1987, Broumas began trading small amounts of JML Class A stock, in his joint account. Tr. 47 (Haynes). In 1988 and 1989, when his financial difficulties began, Broumas started trading more exclusively in JML Class A stock. Tr. 71 (Haynes). Haynes claimed that, at that time, JML stock was Broumas's largest holding, so he would sell it as he needed money and buy it back when he had funds available from other sources to do so. Tr. 47- 48, 71 (Haynes). Between January 5, 1989 and April 7, 1989, 20 trades of JML Class A stock took place in four accounts Haynes oversaw at Swan Securities/Carey Jamison - BC Theatres, John & Ruth Broumas, Les Girls and Matthew Johnson. Tr. 52-53 (Haynes); Ex. 1105. Johnson, Broumas's grandson, had a long standing account with Haynes. Tr. 53 (Haynes). Haynes was aware of these trades at the time they were occurring, although her husband Dwight Dunton, who worked for her at Swan Securities, might have actually ==========================================START OF PAGE 39====== executed some of them. Tr. 52-53 (Haynes).-[13]- The trades in Broumas's accounts at First Potomac were essentially a continuation of the trades at Swan Securities/Carey Jamison earlier in 1989. Tr. 54 (Haynes). During the period from May 8, 1989, through April 16, 1990, Broumas directed Haynes or those under her control to execute a total of 61 trades for JML Class A stock at First Potomac, in which 506,109 shares were traded, using five different accounts, including accounts for Kevin Lemmon and Lawton Rogers. Ex. 2, 6, 1105.-[14]- Of these 61 trades, Haynes executed 14 trades with Voss & Co., 26 trades with H. Beck, and 14 trades with Lara Millard. Ex. 2, 6, 1105.-[15]- Between May 8, 1989 and November 2, 1989, Broumas directed 13 trades in JML Class A stock in the BC Theatres account. These trades involved 106,500 shares. However, the net change in the account was only an increase of 6,100 shares. Ex. 1105. Accordingly, there is a strong probability that Respondent knew or could have easily inferred that Broumas was engaging in wash sales. Between May 22, 1989 and October 27, 1989, Broumas directed -[13]- Haynes argues (RPFF p. 21) that she was not charged with these trades. She admits, however, that she was aware of these transactions and may have taken the orders. Tr. 52 (Haynes). -[14]- Respondent argues (RPFF p. 21, Tr. 91, 99) that she did not receive orders from Broumas for the accounts of Rogers or Lemon. I do not agree that the testimony in the transcript cited by Respondent stands for the argument raised by the Respondent. -[15]- Haynes argues that she was responsible for only 25% of the trades. RPFF p.21, citing Tr. 194. I do not see support for this percentage at the cited page of the transcript. ==========================================START OF PAGE 40====== 20 trades in JML Class A stock in the Les Girls account. These trades involved 149,850 shares. However, the net change in the account was only an increase of 9,000 shares. Ex. 1105. Between June 5, 1989 and March 5, 1990, Broumas directed 19 trades in JML Class A stock in the joint account. These trades involved 162,759 shares. Ex. 1105. In 1989 and 1990, the only persons at First Potomac other than Broumas who traded JML Class A stock were Kevin Lemmon and Lawton Rogers as well as a customer at a local company. Tr. 65, 67 (Haynes). Substantially all of the JML stock trades that Haynes executed in 1989 and 1990 were in these accounts. Haynes Answer II.H. Haynes understood from Broumas was that he had severe short- term cash flow needs and would need to sell his JML stock to meet commitments in his movie business or to make interest or principal payments on notes. As stated, Broumas told her that he did not want to be embarrassed by missing an interest payment. Tr. 47-48 (Haynes). Haynes maintained posting sheets for each active account reflecting the trading activity in the account. Tr. 74-83 (Haynes); Ex. 485; Defense Exhibits 1-5. It was Haynes's practice to keep a posting sheet for each of her separate accounts. Most of the handwriting on the documents is hers. Tr. 74-75 (Haynes); Ex. 485; Defense Exhibits 1-5. Haynes carried the posting sheets for the Broumas accounts with her from 1984 on, from firm to firm. Tr. 77-78 (Haynes). Haynes posted trades to the posting sheets a week or two after the trade was executed. She would physically enter the ==========================================START OF PAGE 41====== trade on the posting sheet, including the date, number of shares, and the price, either on the buy or sell side. Tr. 79-83 (Haynes); Ex. 485; Defense Exhibits 1-5. At the time that the Broumas trades were occurring, in 1989 and 1990, Haynes had some idea of the flow of trades in each account, and she could see how often buys and sells took place.-[16]- Tr. 79-83 (Haynes); Ex. 485; Defense Exhibits 1-5. From entering trades on her posting sheets, Haynes could approximate Broumas's holdings at any time within 20,000 shares. Tr. 336 (Haynes). Until Haynes ordered the accounts liquidated in or about October 1989, Haynes knew that Broumas was both buying and selling JML Class A stock. Tr. 71-72 (Haynes); Ex. 1105. First Potomac charged a commission on each of Broumas's 61 directed trades, usually 2 cents per share. The commission was not shared with any registered representative, and went into the gross income of the firm. Tr. 84-85 (Haynes). The gross revenue to First Potomac on Broumas's 61 trades was approximately $10,000 minus clearing costs of $25 for each trade. Tr. 85-86 (Haynes). Prior to the end of September or beginning of October 1989, Broumas's trades were just normal business. However, at approximately that time, Haynes told her employees at First Potomac to do "liquidations only" for Broumas. Tr. 69 (Haynes). Sometime in September 1989, Haynes asked Broumas to move his accounts from First Potomac because of her concern that she would -[16]- Respondent argues (RPFF p. 21; Tr. 94-95) that she was not aware of the flow of orders. However, the testimony reflects that most of the account postings were in Respondent's handwriting. Tr. 79. ==========================================START OF PAGE 42====== not be able to liquidate them in the event of a substantial turndown in price. The triggering event that caused Haynes to put Broumas in a liquidating position were his phone calls, which were frantic: "I need money. I need money. I have got to sell stock quick. I need money." Tr. 327, 339 (Haynes). Haynes stated that she became scared. Tr. 339 (Haynes). By 1989, Haynes and Broumas had a longstanding relationship, and Broumas felt that he could tell her things about his finances. I conclude that there is a fair probability that Broumas disclosed to the Respondent that he was manipulating the stock and making wash sales. Haynes was concerned. Her previous firm had a big deficit because of the crash in 1987 and she was extremely conscious of concentrations of stocks that were not liquid. "I was never going to get stuck again. I wanted to protect my firm and the clearing firm." Tr. 347 (Haynes). Haynes stated that after Broumas lost $1.5 million in Syntec, which she believed was in early 1988, and after he told her that he was stuck on a large real estate loan, he would call her and tell her that he had a loan payment due in a few days, and ask if he had any cash available in his account. Broumas would then tell her that he would have to sell some stock to get money for the payment. Tr. 350-351 (Haynes). Haynes knew Broumas was in a tight cash flow situation, which increased towards October 1989. As it increased, her level of nervousness with his entire financial condition and behavior, and the pressure Broumas was under, ==========================================START OF PAGE 43====== increased also. Tr. 351 (Haynes). Haynes did not call other broker-dealers to see if they would take over Broumas's accounts. She asked Broumas to explore where he wanted to transfer them. Tr. 327-328 (Haynes). Broumas told Haynes that he could find no place willing to take his accounts. Haynes then told Broumas, in mid-October 1989, that she would only take sell orders for JML stock, but she did not confirm this in writing. Tr. 328-329 (Haynes). The transactions after that point were mostly sell transactions. It took 20 or more transactions to liquidate the positions. These were either Broumas-directed trades, or sales on the AMEX. Tr. 329 (Haynes). Haynes claimed that all trades after October 14, 1989, were liquidating trades. She believed there were 6 AMEX trades and perhaps 14 directed trades done between October 1989 and March 1990 in order to liquidate Broumas's position. Tr. 330 (Haynes). However, Broumas bought JML Class A stock into his accounts on November 2 and November 6, 1989. Haynes claimed that one transaction was a mistake and the other one was done by Dunton and she was angry about it. Tr. 332-333 (Haynes); Ex. 1105. In October 1989, Haynes was aware that Broumas's JML Class A stock holdings in his accounts were approximately 100,000 shares. Tr. 336 (Haynes). One of the purchases in the Broumas accounts was supposed to be a purchase by Matthew Johnson, Broumas's grandson. Tr. 340-341 (Haynes). Haynes charged Broumas with the Johnson trade because she was not there when Broumas called. He spoke to Dunton or someone else and said there is stock available ==========================================START OF PAGE 44====== somewhere and my grandson is going to call you, he wants to buy it. Do the trade, and Johnson will call you later to verify it. Haynes called Johnson later to verify it, and he said it was his grandfather's doing, and that Johnson did not have the money to pay for that trade. Haynes was irate, and billed the trade to Broumas's account. She claimed this was the first occurrence she knew of in which Broumas tried to use someone else's account. Tr. 341-342 (Haynes). I do not find this testimony credible. According to both Broumas and Haynes, the general pattern of communications for a directed trade was as follows: Broumas would contact Haynes or the firm and tell her that he wished to buy or sell a certain quantity of JML Class A stock. Broumas would state the quantity of stock he wanted bought or sold and, after Haynes checked the AMEX terminal, at what price. Broumas would then tell Haynes that Broumas would see if he could find anyone who had stock available to sell or who was willing to buy. Broumas would then call Haynes back and tell her where buyers or sellers were available. Tr. 54-55 (Haynes). Haynes claims that she assumed Broumas knew which traders were interested in the stock or who was making markets in the stock and who had a buyer or seller. Tr. 54-55 (Haynes). Most of the trades involved one or more telephone calls, and usually Broumas would tell Haynes that she would be receiving a telephone call from another broker. Tr. 55 (Haynes). I find that Respondent knew or should have known that these were wash sales. For each directed trade, Broumas decided that the trade ==========================================START OF PAGE 45====== would be over-the-counter, and selected the other side of the trade. He told Haynes where she should call or that he had a buyer or seller who would call her. Tr. 56-57 (Haynes). Broumas knew how many shares he had in each account, and he decided how many shares were to be bought or sold, and to or from which of his accounts. Tr. 57-58 (Haynes). Haynes claimed that Broumas never told her a price, that she would always get the best price that she could. When Broumas called, she looked on the AMEX screen and told him the bid and ask price, and Broumas told her to do the best that she could. Tr. 58-59 (Haynes). In 1989 and 1990, other than Broumas, no other customers called and ordered trades in the way and to the extent that Broumas did. Haynes considered his trading unusual. Tr. 65 (Haynes). Kevin Lemmon was introduced to Haynes in a telephone call with Broumas on December 18, 1989, as one of the bank's vice presidents. Broumas then turned Lemmon over to Haynes and he opened an account. Tr. 96-98 (Haynes); Ex. 258; Defense Exhibit 5. Lemmon purchased 9,000 shares at $6 a share of JML Class A stock, which was consummated over-the-counter. Lemmon signed a margin agreement and paid $27,090, which was one-half of the price, with a check that did not clear due to insufficient funds. On December 29, 1989, Haynes sold out the account, in another over-the-counter trade. Tr. 98-100 (Haynes); Ex. 1044, 1049, 1105. Lawton Rogers opened an account with Haynes to buy JML stock at Swan Securities/Carey Jamison on March 6, 1989, which carried ==========================================START OF PAGE 46====== over into First Potomac. Tr. 86-88 (Haynes). Haynes knew that Lawton Rogers was an account that Kulak had left at Voss & Co. and for which she had taken orders when she worked there. Tr. 86 (Haynes). Beginning in January 1990, Rogers began to more actively trade in JML Class A stock. He called Haynes and said he wanted to buy 12,000 shares. Rogers stated that he understood he would only be charged 2 cents per share if the trade was done over-the-counter with a local firm, and that Broumas would let Haynes know where there was stock available. Tr. 88-89 (Haynes). It is significant that the commission arrangement was the same as Broumas's. It tests credulity to accept the fact that this was not part of one scheme known at the time by Respondent. According to Haynes, Lawton Rogers did not direct his trades. He would call and tell Haynes to call Broumas to determine where she should buy or sell the stock. Rogers called in the trade to her, but Broumas was to know where JML stock was available. Tr. 67 (Haynes). Once someone at First Potomac spoke to Broumas, the trade was executed in the same manner as Broumas's directed trades. Tr. 90 (Haynes). Haynes claimed not to have known of any relationship between Rogers and Broumas, other than that they knew each other. I do not find this claim credible. She did acknowledge, however, that in November 1989, Rogers provided a letter on behalf of Broumas to Haynes concerning Broumas's JML stock ownership. Rogers at that time was acting as counsel to James Madison. Tr. 87-88 (Haynes); Defense Ex. 8. ==========================================START OF PAGE 47====== Between January 25, 1990 and April 16, 1990, seven trades for JML Class A stock took place in Rogers's account, four purchases and three sales. Each was done in the same manner, i.e., Rogers would call in the trade, but Broumas would then supply the necessary information regarding the contra broker. Tr. 90-91 (Haynes); Ex. 1105. Rogers's seven trades involved 69,000 shares of JML Class A stock. However, the result of the trades was that, by April 16, 1990, the account had no shares--an equal amount, 34,500 shares, had been bought and sold. Tr. 93 (Haynes); Ex. 1105. In general, in 1990, Haynes was not allowing Broumas to buy any JML Class A stock in his accounts. She believed it took until March 1990 for Broumas to totally liquidate his accounts. Tr. 92 (Haynes). However, Rogers was allowed to buy JML Class A stock beginning in January 1990. Haynes claimed that Rogers was an attorney and could not afford to give her a check with insufficient funds, and that she recognized his name as one known to have made sizeable purchases in the past. Tr. 92-93 (Haynes). When Haynes sold JML Class A stock for Broumas, in a directed trade, he would always want the proceeds wired from the clearing firm the next morning. Tr. 62-64 (Haynes). The clearing firm wired Broumas money the next day on sales. The amount available was determined by the margin regulations. Tr. 62-63 (Haynes). On a purchase, Broumas would take the full amount of time to pay on settlement date. Tr. 64 (Haynes). Haynes knew as early as 1984 that Broumas used his margin ==========================================START OF PAGE 48====== accounts to obtain funds within one day of a sale, and to pay for a purchase in five business days. Tr. 101-103 (Haynes). Further, as Broumas got into financial difficulty, in 1988, it became his standard practice, after a sale, to call the next morning and ask how much cash was available out of his account, and to make payment for a purchase at the latest permissible time, five business days after the trade. Tr. 103-104 (Haynes). In August or September 1989, Broumas told Haynes that a check he wrote at the bank had insufficient funds. He did not want to be embarrassed by a returned check, and he asked Haynes how much money he could get out of his margin accounts to cover the check. Tr. 104-105 (Haynes). According to Haynes, Broumas "was looking for money, money in a hurry." Tr. 105 (Haynes). Broumas had performed a sale a day before this call, and he wanted Haynes to immediately wire available cash to him at the bank to cover the check. Tr. 105 (Haynes). Haynes then began to "sense a financial panic going on" and she questioned whether she should let Broumas buy any more JML stock. Tr. 105 (Haynes). As early as 1984, at First Potomac Securities Corporation, Broumas took available cash out of his margin accounts through check writing capabilities in the account. He did not have to ask Haynes for money. Tr. 106-107 (Haynes). This check writing feature ceased in 1987, when the firm went out of business. Broumas could not write checks on his account at either Swan Securities or Carey Jamison. At those firms, Broumas would ask the clearing firm to wire him money that was available. Tr. 107 ==========================================START OF PAGE 49====== (Haynes). While at Swan Securities and Carey Jamison, Haynes knew that Broumas was asking for money as soon as available in his margin account. Tr. 107 (Haynes). With regard to Broumas using the float in his margin accounts, Haynes claimed it was a perfectly legitimate practice. Broumas was paying interest on the money, and the clearing firm was happy to loan him the money. The payment was permitted by margin regulations. It seemed to be standard industry practice with the clearing firms for available cash to be obtained from a margin account the day after a sale. Tr. 316-318 (Haynes). Haynes, having closed the Broumas accounts, had two conversations with Richard Chema during or after March 1990 concerning Broumas's possible motivations for doing his trades. Tr. 107-108 (Haynes). In mid-March 1990, Chema asked Haynes if she was still doing business with Broumas. She told him that she had closed his account and liquidated Broumas's positions because he was in a financial crisis and she did not want to be stuck with a bad check and having to liquidate 100,000 shares of JML stock into a market that was not liquid. Tr. 108 (Haynes). Haynes told Chema that Broumas would be in big trouble if JML stock fell to $5 per share because most of the firms do not margin below that price, and Broumas was fully margined. Chema said that he thought one of the reasons that Broumas had sought him out was because his clearing firm did margin stock below $5. Tr. 108-109 (Haynes). Haynes knew that, of the 61 JML Class A stock trades directed by Broumas through his accounts, or that of ==========================================START OF PAGE 50====== Lawton Rogers's, that 26 were with H. Beck, Chema's employer. However, she claimed that she did not know until mid-March 1990 that Broumas had an account with Chema. Tr. 108-109 (Haynes). I do not find this contention credible. Haynes believed that Chema was acting as a trader at H. Beck for over 100 registered representatives throughout the country, and not as a registered representative with his own accounts. Tr. 109-110 (Haynes). Haynes claimed that Dunton executed most of First Potomac's trades with Chema, because she and Chema avoided each other. However, she knew that Chema executed all of H. Beck's stock orders, and therefore that Chema was executing each of the Broumas trades when H. Beck was the contra broker.-[17]- Tr. 110 (Haynes). Dunton and Haynes, husband and wife at the time, worked in the same room at First Potomac and overheard each other's conversations. Tr. 111-112 (Haynes). The second conversation with Chema occurred in June 1990. At that time, Chema told Haynes that Broumas had bought and sold with him (Chema) like he (Broumas) did with Haynes until the account "crashed and burned." Tr. 112 (Haynes). In 1989, Haynes was aware that volume reporting requirements existed for over-the-counter trades for exchange listed securities. Tr. 114-115 (Haynes). Haynes was aware of Schedule G of the NASD Rules of Practice in 1989, and its requirements, -[17]- Respondent objects (RPFF p. 22) to the statement that Chema was executing Broumas's trades. If Respondent was selling the Broumas shares through Chema, this is an accurate statement. However, it is not clear how Respondent would know if Chema was buying the shares unless he made some disclosure. ==========================================START OF PAGE 51====== but all of her previous third market trades were with reporting members and, since she did not have a NASDAQ machine, she did not think she could be a reporting member. Tr. 115-116 (Haynes). Her understanding was that Schedule G controlled how volume was to be reported on third market trades, and that the person with a NASDAQ machine was to report volume. Tr. 117 (Haynes). In 1989, Haynes discovered from the NASD that the volume reporting rule required that the sell side of the transaction report the volume. Tr. 118 (Haynes). If a broker did not have a NASDAQ machine, she was to call a NASDAQ operations center in New York and report the volume. Tr. 117-121 (Haynes). After July 1, 1989, Haynes reported the volume on 25 out of 30 Broumas directed trades in JML Class A stock, in which Haynes was on the sell side. The total reported volume was 218,384. Tr. 121 (Haynes); Ex. 4, 1105. After July 1, 1989, the volume on 6 trades in which Haynes represented the buy side for Broumas was reported by the sell side broker. Ex. 4, 1105. The total reported volume on the 31 trades was 259,884 shares of JML Class A stock. Ex. 4, 1105. In 1989 and 1990, Haynes claims that she had no understanding what the term wash trade meant in terms of the brokerage industry. Tr. 122 (Haynes). I do not find this claim credible. In 1989 and 1990, Haynes did not have any written procedures in place at First Potomac to detect or prevent wash trades. Tr. 123 (Haynes).-[18]- -[18]- Respondent argues (RPFF p. 22) that wash trades were not subject to regulatory prohibitions since the NASD approved their (continued...) ==========================================START OF PAGE 52====== Haynes Aided and Abetted Broumas In order to establish liability for aiding and abetting, the Division must establish (1) the existence of a primary violation, (2) a "knowledge" requirement, i.e., that the aider and abetter had general awareness that his role was part of an overall activity that was improper, and (3) that the aider and abetter substantially assisted the principal violation. Kevin Upton, 58 SEC Docket 1993, 2001 (1995); Dominick & Dominick, Inc., 50 S.E.C. 571, 577 (1991). In applying these elements, all three should be examined collectively, and no single element should be considered in isolation. See ITT, International Investment Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). In my March 24, 1995 Order, I found that Broumas manipulated the market for JML Class A stock, and in doing so violated Sections 9(a)(1), 9(a)(2)-[19]- and 10(b) of the Exchange -[18]-(...continued) compliance manual without mention of wash trades. However, wash trades are prohibited under Section 9(a)(1) of the Exchange Act. -[19]- However, the Order in the instant case fails to charge the Respondent with a violation of Section 9(a)(2), so it will not be considered. According to the Senate Report on the Exchange Act, Section 9(a)(2) was intended to "perform the wholesome service of outlawing pool operations, as well as every other device designed to persuade the public that activity in a security is the reflection of a genuine demand instead of a mirage" while Section 9(a)(1) was intended "to eliminate wash sales, matched orders, and all other devices designed to create a misleading appearance of activity, with a view to enticing other persons to come into the market and trade." S. Rep. No. 1455, 73d Cong., 2d Sess. 54 (1934). While I agree with Respondent that she cannot be held liable for an alleged violation without notice and opportunity to defend (See Checkosy v. SEC, 23 F.3d 452, 481 (D.C. Cir. 1994)), I see no effect of the failure to include Section 9(a)(2) in the Order on the sanctions imposed. ==========================================START OF PAGE 53====== Act and Rule 10b-5 thereunder. The Division showed, as it was required to, that the respondent had an "awareness of the underlying facts (which gave rise to the violations), not the labels the law places on those facts .... A knowledge of what one is doing and the consequences of those actions suffices." SEC v. Falstaff Brewing Corp., 629 F.2d 62, 77 (D.C.Cir.), cert. denied, 449 U.S. 1012 (1980). The evidence in this case demonstrates that Haynes knew that she was assisting Broumas in carrying out his manipulative scheme. Haynes had a business relationship with Broumas that, by 1989, was over ten years old, and she possessed an enormous amount of actual knowledge concerning Broumas's activities. For example, Haynes knew that: ú Broumas was the chairman of the board and president of Madison of Virginia, and a director of James Madison, Ltd.; ú Broumas had received a large amount of JML Class A stock in the buy out of McLean Bank; that he had deposited 150,000 shares with her firm; and that he was likely a multi-millionaire; ú Broumas's financial condition, beginning in 1988, had begun to deteriorate; that he had lost a tremendous amount of money on Syntec stock; that his real estate investments were suffering; and that he was responsible for substantial interest and principal payments on a loan. Broumas had told her all of these things; ú Broumas had, for many years, always asked for and received payment within a day after a sale in his margin accounts, but waited the full five business days before paying for stock purchases; ú Broumas's pattern of payment continued with his JML stock trading at First Potomac, and then got worse; by August or September 1989, he was becoming desperate, telling her: "I need money. I have got to sell stock quick. I need money." She knew Broumas was "looking for money, money in a hurry." She began to "sense a financial panic going on;" ==========================================START OF PAGE 54====== ú Broumas had accounts at other broker-dealers in the Washington, D.C. area, including Voss & Co. and Lara Millard, where she had previously worked; ú Broumas directed 61 over-the-counter trades in JML Class A stock, through five separate accounts, three of which he controlled, involving 506,109 shares. Of these trades, she knew that 14 were with Voss & Co., that 26 were with Chema, her previous employee, at H. Beck, and that 14 were with Lara Millard; ú Broumas had directed 20 trades of JML Class A stock in accounts held with her at Swan Securities/Carey Jamison in early 1989, and that the First Potomac trades were a continuation of these trades; ú Broumas provided every detail for each of his directed trades, and requested the specific contra broker for each trade; ú it was highly unusual for a customer of First Potomac to direct his trades in the manner that Broumas directed his JML trades, and that Broumas's trades were not logical; ú in 1989 and 1990, the accounts used by Broumas at First Potomac traded JML stock almost exclusively; ú in 1989 and 1990, other than Broumas, the only persons who traded JML Class A stock at First Potomac were Lemmon and Rogers; ú Lemmon worked for Broumas at Madison of Virginia; ú Rogers and Broumas knew each other, and Rogers had provided a letter on behalf of Broumas to Haynes concerning Broumas's JML stock ownership; ú Broumas was providing the contra broker for trades in the Rogers's account, and that, at a time when she would not permit Broumas to buy shares in his accounts, she permitted purchases in Rogers's account; ú Broumas's ownership of JML stock increased and decreased over time, as indicated on the posting sheets she maintained for each account which reflected the exact nature of Broumas's trading, and which provided Haynes with the flow of buy and sells in the account; ú she had personally reported volume on 25 of Broumas's directed trades, totalling 218,384 shares of JML Class A stock; and that ú in essence, Broumas's motivation for his wash trades and matched orders, to allow him to effect his manipulative trading ==========================================START OF PAGE 55====== scheme. Accordingly, there is ample evidence that Haynes was clearly aware of her role in Broumas's manipulative scheme and that she played a central, key, role in the scheme. She possessed the knowledge of Broumas's motivations, and she chose to ignore it. The Commission has found recklessness to be sufficient for purposes of aiding and abetting liability. Raymond L. Dirks, 47 S.E.C. 434, 447 (1981), rev'd on other grounds, Dirks v. SEC, 463 U.S. 646 (1983). In Lanza v. Drexel & Co., 479 F.2d 1277, 1306 n.98 (2d Cir. 1973) (en banc)(emphasis added), the court opines: [T]he inquiry normally will be to determine whether the defendants knew the material facts misstated or omitted, or failed or refused, after being put on notice of a possible material failure of disclosure, to apprise themselves of the facts where they could have done so without any extraordinary effort. Haynes failed to make adequate inquiry -- "to apprise [herself] of the facts where [she] could have done so without any extraordinary effort" -- and accordingly acted recklessly under the Lanza test. The concept of duty to inquire runs throughout the federal securities laws. In the context of supervision, the Commission has said that, "Red flags and suggestions of irregularities demand inquiry as well as adequate follow-up and review." Frederick H. Joseph, 54 SEC Docket 283, 291 (1993); see Edwin Kantor, 54 SEC Docket 293 (1993). In the context of market manipulation, the Commission has stated that, "The totality of [the] circumstances at the least placed [the broker] on notice that a searching inquiry was called for as to the nature of the ==========================================START OF PAGE 56====== [primary violator's] activity and interest, yet [the broker] made no meaningful investigation. Instead, he closed his eyes to circumstances indicative of a scheme to create the false appearance of an independent market." Alessandrini & Co., 45 S.E.C. 399, 404 (1973). Haynes's conduct demonstrated extreme recklessness: ú In light of all of the things that Haynes knew, accepting her testimony, including her knowledge that Broumas maintained accounts at other broker-dealers, Haynes was reckless, in assuming that wash trading could not be taking place; ú Considering her relationship with Broumas, her knowledge of his financial plight and desperation for money, and her knowledge of the way in which he used his margin accounts, Haynes was reckless in not asking Broumas whether he controlled the other side of the trades, why the trades were directed, or why the trades were being done on the over-the-counter market; ú Haynes knew the individuals and firms that Broumas was trading with, and she was reckless in not making inquiry of others within the brokerage community; ú Haynes was reckless in executing 61 trades for Broumas in JML Class A stock in less than one year when she admitted that she thought Broumas's trading was illogical and unusual; ú Haynes was reckless in allowing Broumas to buy through Rogers's account, at the same time she was supposedly asking Broumas to liquidate his accounts; and ú Haynes was reckless in not realizing that all of the above facts led to the conclusion that Broumas's trading was improper and manipulative. "The importance of a broker-dealer's responsibility to use diligence where there are any unusual factors is highlighted by the fact that violations of the anti-fraud and other provisions of the securities laws frequently depend for their consummation, as here, on the activities of broker-dealers who fail to make diligent inquiry to obtain sufficient information to justify ==========================================START OF PAGE 57====== their activity in the security." Alessandrini & Co., 45 S.E.C. at 406 (broker-dealer held to have willfully violated or willfully aided and abetted the violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Exchange Act). Haynes was not diligent, although she claims that she was. She was scared, as she admitted, and wanted to insulate herself and her firm from the effects of Broumas's irrational trading and financial problems. Haynes's sole concern in 1989 was to protect herself and her firm from financial catastrophe, as had happened to her in 1987 with her previous firm. As Haynes clearly stated at the hearing, "I was never going to get stuck again. I wanted to protect my firm and the clearing firm." In this instance, Haynes was so concerned about protecting her interests that she recklessly allowed Broumas to effect his wash trades. By doing so, she violated her duty as a member of the brokerage community. Whatever Broumas had to do to get rid of his shares of JML Class A stock, and get them out of his accounts at First Potomac, was fine with Haynes. Her testimony suggests that she did not care who was on the other side of Broumas's liquidating sales as long as it was someone else. At a minimum, Haynes was extremely reckless in not realizing that what she was doing was part of something improper. She knew Broumas's financial condition. She knew the manner in which he traded. She knew that he obtained payment for the sales immediately, and paid for the purchases at the last possible day. She knew that his situation was becoming ==========================================START OF PAGE 58====== more and more serious. She had her own concerns in terms of her firm's exposure. Given these facts, Haynes could not continue to do transactions the way she always had. She was reckless to continue to do that, 61 different times. After being told to liquidate, Broumas continued to trade for at least five months. Where was the market for these trades? Was there a market each day that Broumas would call and order a sale? If Haynes really wanted him out, perhaps she should have found directors or others to buy Broumas's JML stock. Haynes also was reckless (accepting for the purposes of argument her representations) in not knowing what wash trades were, after almost 20 years in the industry, including seven with the NASD. On the 31 days that Haynes's trades were reported, the market was completely defrauded. Much of the volume in the newspaper the next day was Broumas trading with himself. The effect was obviously substantial and material. The very harm that wash trades can cause existed in this case. Anyone looking in the market the next day and seeing that JML was an active stock would have been defrauded. Haynes "failed or refused, after being put on notice of a possible material failure of disclosure, to apprise [herself] of the facts where [she] could have done so without any extraordinary effort." Lanza, 479 F.2d at 1306 n. 98. Such recklessness "presents a danger of misleading buyers and sellers," Sundstrand Corp. v. Sun Chemical Corp., 533 F.2d 1033, 1047 (7th Cir. 1976), cert. denied, 434 U.S. 875 (1977), who rely on the market information reported to ==========================================START OF PAGE 59====== the AMEX and fed into the marketplace. Haynes continued to accept Broumas's orders and cause them to be executed. Despite the clear pattern that had emerged, she shut her eyes to what was taking place. To constitute substantial assistance, the broker's actions must be a causal factor in bringing about the primary violation. See, e.g., Index Fund, Inc. v. Hagopian, 609 F. Supp. 499, 510 (S.D.N.Y. 1985). "Although the philosophic 'but for' test is not sufficient for liability, the substantial assistance rendered by the aider and abettor need not be the sole cause or the principal cause; it need only be one of the causes." W. Kuehnle, Secondary Liability Under the Federal Securities Laws -- Aiding and Abetting, Conspiracy, Controlling Person, and Agency: Common Law Principles and the Statutory Scheme, 14 J. Corp. L. 313, 340 (1989). "Consideration should be given to [a] number and effect of other factors, and to whether the conduct was harmless until acted upon ...." Id. The amount and type of assistance required may vary with the broker's degree of knowledge of the impropriety. See Woodward v. Metro Bank of Dallas, 522 F.2d 84, 95 (5th Cir. 1975). Broumas could not have conducted his manipulation without the willing assistance of several securities professionals. Broumas directed Haynes to execute 61 wash trades and matched orders for him in less than one year. Haynes's conduct, combined with her actual knowledge and recklessness, substantially assisted Broumas's underlying violation. "The manipulative [scheme]...as so often is the case[,] ==========================================START OF PAGE 60====== could not have succeeded without the active or passive assistance of broker-dealers." Alessandrini & Co., 45 SEC at 410. Courts have recognized a duty to the marketplace on the part of securities participants as necessary to instill integrity and confidence in the markets. For example, the Second Circuit, in finding fraud in connection with insider trading, stated, "As an employee of a broker-dealer, [the broker] had violated [his] obligations to the SEC and to the public completely independent of any [other] 'obligations he acquired' as a result of receiving the information." Dirks v. SEC, 681 F.2d 824, 840 (D.C. Cir. 1983)(emphasis added), quoted with approval by the Supreme Court, 463 U.S. 646, 652 (1983). Courts have recognized what the alternative would be if a duty to the marketplace were not insisted upon: Nor, in our view, could any purported function of the scheme be considered protected given Congress' stated concern for the perception of fairness and integrity in the securities markets and the potential costs of forsaking such legislated concerns, including fewer market participants and greater reliance on fraud as a means of competing in the market. United States v. Carpenter, 791 F.2d 1024, 1030 (2d Cir. 1986) (citing H.R. 9323, 73d Cong., 2d Sess. Rept. No. 1383, at 7865- 66), aff'd by an equally divided court, 484 U.S. 19 (1987). The Commission and the courts have insisted on the highest possible professional and ethical standards on the part of those who desire to participate in the securities industry. Brokers are required to meet relatively strict requirements in entering their profession and they thereby gain the advantage and exclusive privilege of trading in the national securities market on behalf of a wide range of investors. The Court finds a stock exchange broker acting in that capacity owes a duty to the ==========================================START OF PAGE 61====== investing public commensurate with professional responsibilities and privileges growing out of this position. Piper, Jaffray & Hopwood, Inc. v. Ladin, 399 F. Supp. 292, 298- 299 (S.D. Iowa 1975). When brokers fail to satisfy such professional and ethical standards, liability under the anti- fraud provisions generally follows: "Underlying Section 10(b) and the major securities laws generally is the fundamental promotion of the 'highest ethical standards...' in every facet of the securities industry." United States v. Carpenter, 791 F.2d at 1031 (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186-87 (1963)). Under no analysis of the facts in this record can it be said that Haynes met such high standards. Haynes's conduct was both knowing and reckless and she violated the duty to the public that she undertook as a securities professional. Section 21C of the Exchange Act provides that: If the Commission finds, after notice and opportunity for hearing, that any person is violating, has violated, or is about to violate any provision of this title, or any rule or regulation thereunder, the Commission may publish its findings and enter an order requiring such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision, rule, or regulation. [15 U.S.C.  78u-3] (emphasis added). A finding that the respondent aided and abetted a violation also will constitute a finding that the "[respondent's] conduct was necessarily a 'cause' under Section 21C of the Exchange Act of a violation of the securities laws." Dominick & Dominick, Inc., 571 S.E.C. at ==========================================START OF PAGE 62====== 578 n.11. Because Haynes aided and abetted Broumas's violations of Sections 9(a)(1) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder, she also caused the manipulation in violation of Section 21C. Even if Haynes had not aided and abetted Broumas's violations, Haynes would still have violated Section 21C. The "cause" language of this provision includes a "should have known" standard -- classic negligence language. Knippen v. Ford Motor Co., 546 F.2d 993, 1003 (D.C. Cir. 1976); see also Heit v. Weitzen, 402 F.2d 909, 914 (2d Cir. 1968), cert. denied 395 U.S. 903 (1969)(The charge that defendants knew or should have known of the falsity of certain statements alleged both scienter -- "knew" -- and negligence -- "should have known."); Levine v. CMP Publications, Inc., 738 F.2d 660, 674 (5th Cir. 1984)(sustained a defamation judgment on a theory of negligence where the court found the publisher "knew or should have known" the article in question was false). Thus, the negligence standard typically applies in any circumstance where, as here, respondents "should have known" the likely results of their conduct. Section 15(b)(6)(A) of the Exchange Act authorizes the Commission to "censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar such person from being associated with a broker or dealer" if the Commission finds, after notice and opportunity for hearing, that such sanction is in the public interest and ==========================================START OF PAGE 63====== such person has, among other things, willfully-[20]- violated any provisions of the Exchange Act or the rules and regulations thereunder. See Sections 15(b)(6)(A)(i) and 15(b)(4)(D). In imposing administrative sanctions, the Commission may take into account such factors as: ... the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that his occupation will present opportunities for future violations. See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir., 1979), aff'd on other grounds, 450 U.S. 91 (1981). Congress, in writing Section 15(b) of the Exchange Act, viewed past misconduct as the basis for an inference that the risk of probable future misconduct was sufficient to require exclusion from the securities business. Having been directed by the Act to draw that inference whenever our discretion leads us to consider it appropriate, we must do so if the legislative aim is to be attained. Arthur Lipper Corporation, 46 S.E.C. 78, 101 (1975). See also George Inserra, Fed. Sec. L. Rep. (CCH) [Transfer Binder] 84,334 at p. 89,524. -[20]- Willfully means only intentionally committing the act which constitutes the violation. Arthur Lipper Corp. v. SEC, 547 F. 2d 171, 180 (2d Cir. 1967): "All that is required is proof that the broker-dealer acted intentionally in the sense that he was aware of what he was doing," quoting 2 Loss, Securities Regulation 1309 (1961); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). It means "no more than that the person charged with the duty knows what he is doing." Hughes v. SEC, 174 F. 2d 969, 977 (D.C. Cir. 1949). Willfulness does not require proof of evil motive. International Shareholders Service Corp. 46 S.E.C. 378, 382 (1976). No showing of an intention to violate the law need be made in order to support a finding of willfulness in an administrative proceeding under the Exchange Act. Id..; A.J. White & Co., 45 S.E.C. 459, 460 n.5 (1974). ==========================================START OF PAGE 64====== The Division recommends that Haynes be suspended from the securities industry for a period of twelve months. I find the recommendation too harsh considering that she made some effort to check the propriety of Broumas's behavior with the NASD and the SEC and that she was not involved in marking-the-close transactions. However, the behavior on the part of Haynes was very serious. The trading in question and Haynes's role in executing wash trades on behalf of Broumas did not occur just once, or infrequently, but 61 times in less than one year. Haynes acknowledged no wrongdoing on her part. She showed little appreciation for the meaning and significance of her illegal activities. In this instance, Haynes obviously did not appreciate the high standards of conduct to which she is subject as a registered securities professional. This is especially blameworthy considering Respondent was formerly an NASD employee and is a principal and owner of a broker-dealer firm. Respondent argues she was blameless inasmuch as the NASD and the SEC should have informed her that the trades being made by Broumas were illegal. RPFF p. 43. This argument has, as indicated, some weight in mitigation of the sanctions imposed. However, it is limited in effect inasmuch as Section 9(a)(1) of the Exchange Act clearly proscribes wash sales. NASD and SEC staff were concluding investigations of Broumas and they were not obliged to make disclosures that would compromise their work. Haynes is still employed in the securities industry, and she owns and operates a registered broker-dealer. Accordingly, she will ==========================================START OF PAGE 65====== have ample opportunity to engage in similar misconduct in the future. The public interest requires the sanction as set out below. Section 21C(a) of the Exchange Act provides that, after notice and opportunity for hearing, an order may be entered requiring the person "to cease and desist" from committing or causing such violation and any future violation of the same provision, rule or regulation. It is concluded that it is in the public interest that Carole L. Haynes be sanctioned as follows: ORDER IT IS ORDERED that Carole L. Haynes be suspended from association with any broker or dealer under Sections 15(b)(6) and 19(h) of the Exchange Act for a period of five months. Haynes is ordered under Section 21C of the Exchange Act to permanently cease and desist from committing or causing any violation of, and from committing or causing any future violation of, Sections 9(a)(1) and 10(b) of the Exchange Act and Rule 10b-5 thereunder. This order shall become effective in accordance with and subject to the provisions of Rule 17(f) of the Rules of Practice. Pursuant to Rule 17(f) of the Rules of Practice, this initial decision shall become the final decision of the Commission as to each party who has not, within fifteen days after service of this initial decision upon her, filed a petition for review of this initial decision pursuant to Rule 17(b), unless the Commission, pursuant to Rule 17(c), determines on its own initiative to ==========================================START OF PAGE 66====== review this initial decision as to her. If a party timely files a petition for review, or the Commission takes action to review as to a party, the initial decision shall not become final with respect to that party. _________________________ Glenn Robert Lawrence Administrative Law Judge Washington, D.C. November 24, 1995