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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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In the Matter of LAURIE JONES CANADY |
: |
INITIAL DECISION
November 26, 2001 |
| APPEARANCES: | Celiza P. Braganca and Jerrold H. Kohn for the Division of Enforcement, Securities and Exchange Commission
William T. McCartan for Laurie Jones Canady |
Issue
The issue is whether Ms. Canady has shown by an accounting that certain commissions she received should not be disgorged because they were received for unsolicited trades.1
Background
On April 5, 1999, the Securities and Exchange Commission ("Commission") issued an Opinion in Laurie Jones Canady, 69 SEC Docket 1468 (Apr. 5, 1999). The Commission found that in 1988 and 1989 Ms. Canady, as a registered representative associated with Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill"), in Davenport, Iowa, willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Specifically, Ms. Canady (1) churned the accounts of four customers, (2) made material misrepresentations and failed to provide customers with material information, (3) made fraudulent unsuitable recommendations to customers, and (4) deceptively engaged in an unauthorized trade in a customer account. See Canady, 69 SEC Docket at 1475, 1480, 1482, 1484. On October 31, 2000, the United States Court of Appeals for the District of Columbia denied Ms. Canady's petition for review of the Commission's Order Imposing Remedial Sanctions ("Order") that directed Ms. Canady to disgorge $23,624.00 in commissions that she had earned on solicited trades for four customers ("Testifying Customers"), to pay prejudgment interest of $28,069.00 and barred her from future association with any securities broker or dealer. See Canady v. SEC, 230 F.3d 362 (D.C. Cir. 2000).
In its Opinion, the Commission directed that:
[I]n light of our determination to reverse the law judge's finding of churning in the accounts of the Non-testifying Customers, we have determined to reduce the disgorgement amount ordered by the law judge to exclude the commissions paid by the Non-testifying Customers' accounts. We also have determined to reduce the disgorgement amount by deducting commissions on unsolicited trades for all of the accounts at issue here. We have further determined to deduct from the disgorgement amount any amounts Canady has already paid to the Testifying Customers in settlement of claims made by those customers with respect to the conduct at issue here. To this end, Canady may submit an accounting showing commissions paid to her as a result of unsolicited trades and any amounts paid by her in settlement of claims made by the Testifying Customers.
Canady, 69 SEC Docket at 1486-87 (footnote omitted). The law judge's decision is at Canady, 60 SEC Docket 1916 (Oct. 31, 1995).
In its Order, the Commission provided that:
To the extent Canady can establish, through an accounting, that she received commissions during this period from unsolicited trades in the accounts of the Testifying Customers or that she contributed to the settlement of any complaints these Testifying Customers may have filed relating to the conduct that is the subject of this proceeding, the disgorgement amount will be reduced by these amounts.
Canady, 69 SEC Docket 1496 (April 5, 1999).
The Commission allowed Ms. Canady thirty days from the date of the Order, April 5, 1999, to provide the accounting and ordered that interest shall continue to accrue on all funds owed until they are paid. The Commission directed that any accounting be submitted to the Office of Administrative Law Judges ("Office"), and that the designated law judge review the accounting and determine whether it justified a modification in the disgorgement amount. "The law judge shall then set the new disgorgement amount, along with accrued interest, and a new date by which the total amount shall be paid by Canady." Canady, 69 SEC Docket at 1497.
In December or January 2000, when the accounting was already overdue, the Division of Enforcement ("Division") allowed Ms. Canady until February 2, 2001, to make the submission. (Tr. 14.) In a letter to the Division dated January 29, 2001, Ms. Canady requested that she have until February 26, 2001, to submit an accounting because she recently received copies of the record of the hearing.
Current Events
The Office had no record of a pending issue in Canady on June 28, 2001, when Jerrold H. Kohn, Senior Attorney for the Division in the Commission's Midwest Regional Office, called and inquired as to the status of the Canady disgorgement issue. Mr. Kohn transmitted to the Office via facsimile a letter addressed to him from Ms. Canady dated February 25, 2001, enclosing a single sheet that Ms. Canady described as the "accounting of the unsolicited trades."2 (Div. Resp., Exhibit 3.) I issued an Order Assigning Proceeding and Setting Posthearing Conference on July 5, 2001, to carry out the directive in the Commission's Order. See Canady, Order Assigning Proceeding and Setting Posthearing Conference, 75 SEC Docket 1123 (July 5, 2001).
At a posthearing conference, the Division represented that Ms. Canady had not submitted an accounting and that the single sheet that Ms. Canady sent to the Division on February 25, 2001, was "wholly inadequate" despite the extended time period that had been given to her. (Tr. 7.) The parties agreed that an evidentiary hearing was not necessary to resolve the dispute. (Tr. 8-9, 19.) When the Division continued its opposition after reviewing the materials that Ms. Canady used to formulate her "accounting of the unsolicited trades," I ordered a procedural schedule. See Order Following Posthearing Conference, October 1, 2001.
On October 12, 2001, Ms. Canady filed a Verified Accounting to support her claims that she received $15,351.37 in commissions on unsolicited trades and that this amount should be deducted from the $23,624.00 disgorgement amount ordered by the Commission. (Canady VA at 12.) The Verified Accounting consists of a twelve-page written statement; Exhibit A, Ms. Canady's Verification; Exhibit B, the Christianson Sim Materials;3 Exhibit C, the Gruhl Materials; and Exhibit D, the Campbell Materials.
On October 26, 2001, the Division submitted its Response to Verified Accounting that consists of a thirteen-page written statement and nine exhibits.4 After reviewing the transactions that Ms. Canady cited, the Division would reduce the disgorgement ordered by $554.00 representing commissions earned on unsolicited trades. The Division would require Ms. Canady to disgorge $23,070.00, plus prejudgment interest of $27,598.00, and post-judgment interest of $6,615.00 through November 30, 2001. (Div. Resp. at 13, Exhibit 9.)
In her Reply in Support of Verified Accounting filed November 2, 2001, Ms. Canady claims the Commission should reduce the disgorgement amount by $13,642.59 based on her showing of unsolicited trades.5 (Canady Reply at 7.)
Position of the Parties
Ms. Canady's Verified Accounting
Ms. Canady submitted as part of Exhibits to her Verified Accounting, computer printouts from Merrill Lynch Client Statements ("Merrill Printout") for the accounts of three of the four Testifying Customers: Carolyn M. Campbell, Cynthia Christianson Sim, and Mary and Richard Gruhl. (Canady VA, Exhibits B, C, D.) Ms. Canady does not concede that all the trades for the fourth Testifying Customer, Evelyn Fasbender, were solicited, but she does concede that she cannot provide convincing support for her position. (Canady VA at 11.)
Ms. Canady's Verified Accounting shows each trade that she claims was unsolicited. For each trade, the list provides the following categories of information: Group, Trade Date, Quantity, Security, and Commission. Ms. Canady argues that "significant evidence in the record" shows that these trades were unsolicited. (Canady VA at 2.) The amounts shown in the Commission column are Ms. Canady's "recollection of the standard commission rates of Merrill Lynch at the relevant time for the particular investment product." (Canady VA at 2.) Ms. Canady submitted a sworn affidavit that these amounts are accurate estimates. (Canady VA at 2, Exhibit A.)
A detailed description of Ms. Canady's accounting follows.
Carolyn M. Campbell
The Merrill Printout covers two accounts for Ms. Campbell. One printout shows six purchases from April 4, 1988, to March 13, 1989. The other printout shows ten purchases from March 4, 1988, through March 13, 1989. (Canady VA, Exhibit D.) Ms. Canady claims that the following seven of sixteen purchases in these accounts were unsolicited. (Canady VA at 7.)
| Group | Trade Date |
Quantity | Security | Commission |
| CC1 | 3/4/88 | 691 | EATON VANCE H INCM TRU SBI | $257.88 |
| CC1 | 4/26/88 | 1075 | EATON VANCE H INCM TRU SBI | $440.42 |
| CC2 | 4/27/88 | 13 | CIF HI YLD SER 17 | $364.00 |
| CC2 | 5/25/88 | 28 | CIF HI YLD SER 2 | $878.43 |
| CC2 | 8/04/88 | 30 | CIF HI YLD SER 10 | $893.78 |
| CC2 | 3/13/89 | 17 | CIF 236th MPS | $587.87 |
| CC2 | 3/13/89 | 13 | CIF 236th MPS | $449.56 |
| _________
$3,871.94 |
Ms. Canady organized her presentation into groups. The first group of alleged unsolicited trades consists of two purchases of Eaton Vance High Income Fund shares on March 4, 1988, and April 26, 1988, respectively. Ms. Canady claims that these two purchases were one transaction made on a single trade ticket that was marked "unsolicited." (Canady VA at 9, Exhibit D at 4.) Ms. Canady earned $698.30 in commissions on these two trades which she argues should be deducted from the disgorgement amount.
The second group of allegedly unsolicited trades consists of five high yield unit investment trust ("UIT") purchases described as "CIF HI YLD SER" 17, 2, or 10 and "CIF 236th MPS" that occurred in Ms. Campbell's account.6 Ms. Canady earned a total of $3,173.64 in commissions on these five trades.
Ms. Canady claims that:
1. A trade ticket marked "unsolicited" for a confirmed order for twenty-eight units of "HYCOO2" dated May 18, 1988, at a price of $871.31 proves that the purchase by Ms. Campbell on May 25, 1988, for twenty-eight UIT units shown on the Merrill Printout as CIF HI YLD SER 2 at a price of $871.340 was unsolicited. Ms. Canady believes that the ticket covers this trade because the number of units is the same despite the fact that the dates are different. (Canady VA at 10, Exhibit D at 3, 5.)
2. A trade ticket marked "unsolicited" for a confirmed order for thirty units of "HYCO1O" dated July 28, 1988, at a price of $821.51 proves that the purchase by Ms. Campbell on August 4, 1988, for thirty units of CIF HY SER 10 at a price of $820.74 was unsolicited. Again, Ms. Canady believes that this ticket covers this purchase shown on the Merrill Printout because the number of units is the same despite the fact that the dates are different. (Canady VA at 10, Exhibit D at 3, 6.)
3. A trade ticket for thirty units marked "unsolicited" for "LTC236" and dated March 6, 1989, at a price of $960.770 proves that two purchases by Ms. Campbell of seventeen and thirteen units of CIF 236th MPS on March 13, 1989, at a price of $961.380 shown on the Merrill Printout were actually one unsolicited purchase. (Canady VA, Exhibit D at 3, 7.) According to Ms. Canady, the Merrill Printout shows two separate purchases because the securities were "later liquidated in two partial sales." (Canady VA at 10.)
4. Ms. Canady has not presented a trade ticket that was marked "unsolicited" to support her claim that the purchase of thirteen units of "CIF HI YLD SER 17" shown on the Merrill Printout on April 27, 1988, was unsolicited. (Canady VA at 11, Exhibit D at 3.) She argues that "the existence of the trade tickets for the similar trades in the same time frame should provide persuasive evidence that his [sic] purchase was similarly unsolicited." (Canady VA at 11.)
Cynthia Christianson Sim
Ms. Canady has presented a Merrill Printout for two of Ms. Christianson Sim's accounts. One account had eight purchases from May 4, 1989, through August 3, 1989. (Canady VA, Exhibit B at 2.) The second account had thirty-six purchases from April 5, 1988, through October 10, 1989. (Canady VA, Exhibit B at 3.)
Ms. Canady claims that six trades shown on the Merrill Printout were unsolicited and that the commissions on these trades, $6,069.65, should be deducted from the disgorgement amount. (Canady VA at 3.)
| Group | Trade Date |
Quantity | Security | Commission |
| C1 | 4/29/88 | 50 | MIT SR 6 MPS | $1,512.00 |
| C1 | 4/29/88 | 40 | MIT SR 6 MPS | $1,209.60 |
| C1 | 5/02/88 | 50 | MIT SR 9 MPS | $1,512.00 |
| C1 | 5/02/88 | 50 | MIT SR 9 MPS | $1,360.80 |
| C2 | 4/08/89 | 38 | JOHN DEERE | $50.00 |
| C3 | 6/29/89 | 291 | ML BASIC VALUE FUND CLASS A | $425.25 |
| _________
$6,069.65 |
Ms. Canady organized the six trades into three groups. The first group consists of four purchases of a municipal investment trust on April 29, 1988, and May 2, 1988, for total commissions of $5,594.40. (Canady VA, Exhibit B at 3.) Ms. Canady claims that Ms. Christianson Sim requested these purchases based on the advice of another of Ms. Canady's clients, Mr. Craig Leslie, an active trader, and that Ms. Canady disagreed with Mr. Leslie's recommendation. (Canady VA at 3-4.)
The second group is a sale of thirty-eight common shares of John Deere on April 8, 1989, for a commission of $50.00. (Canady VA, Exhibit B at 3.) Ms. Canady argues that it is logical to infer from the small, irregular number of shares and the small commission that the trade was unsolicited, and that Ms. Christianson Sim requested the trade to pay for a household item. (Canady VA at 4.)
The final group is a $51,508.47 purchase of 291 Merrill Lynch Basic Value Fund shares on June 29, 1989. (Canady VA, Exhibit B at 2.) Ms. Canady maintains that Ms. Christianson Sim also made this purchase at Mr. Leslie's recommendation. She claims the circumstances surrounding the transaction: the holding time of 447 days, the very low risk associated with the shares, and the modest commission of $425.25 are all consistent with a customer's request rather than solicitation by a broker. (Canady VA at 4-5.)
Richard and Mary Gruhl
Ms. Canady claims that thirteen of the twenty-seven trades that occurred in Richard and Mary Gruhl's account from January 1, 1988, through June 26, 1990, were unsolicited. (Canady VA at 5, Exhibit C.) Ms. Canady received commissions of $5,409.78 on these thirteen trades which she claims should be deducted from the disgorgement amount.
| Group | Trade Date |
Quantity | Security | Commission |
| G1 | 1/1/88 | 5 | ALTUS MOBLE AL CD6.8% 2/24/88 | $50.00 |
| G2 | 1/1/88 | 3541 | ML MCPL BD FD HI YLD | $1,532.78 |
| G3 | 1/1/88 | 44 | US TSY 9.5% 11/15/95 | $63.00 |
| G4 | 1/26/88 | 2193 | EATN VANCE H INCM TR SBI | $1,086.00 |
| G4 | 1/26/88 | 6474 | EATN VANCE H YLD MUN SBI | $2,174.00 |
| G3 | 4/27/89 | 50 | US TSY 7.625% 02/15/07 | $63.00 |
| G3 | 4/27/89 | 50 | US TSY 7.875% 11/15/07 | $63.00 |
| G3 | 4/28/89 | 50 | US TSY 7.25% 05/15/16 | $63.00 |
| G3 | 7/07/89 | 18 | US TSY 7.25% 05/15/16 | $63.00 |
| G3 | 7/07/89 | 82 | US TSY 7.25% 05/15/16 | $63.00 |
| G3 | 7/19/89 | 50 | US TSY 7.25% 05/15/16 | $63.00 |
| G3 | 9/15/89 | 50 | US TSY 7.5% 11/15/16 | $63.00 |
| G3 | 12/21/89 | 45 | US TSY 10.5% 01/15/90 | $63.00 |
| _________
$5,409.78 |
Ms. Canady organized the thirteen trades into four groups. The first group is a purchase on January 1, 1988, of a single bank certificate of deposit that paid her a commission of $50.00. Ms. Canady argues that she has demonstrated that the trade was unsolicited by her testimony at the hearing, and because "a broker seeking to maximize commissions at a client's expense" would not solicit a trade with a modest commission and where the client held the security to maturity. (Canady VA at 6.)
The second group of trades is a purchase of the Merrill Lynch High Yield Bond Fund on January 1, 1988, for a commission of $1,532.78. Ms. Canady cites her testimony at the hearing, and the fact that the security was held for 483 days as "circumstantial evidence that the purchase was not made as part of any scheme to churn the account." (Canady VA at 7.)
The third group of trades consists of nine purchases of U.S. Treasury securities for commissions of $567.00. Ms. Canady relies on her testimony at the hearing to show that the trades were unsolicited. She cites the following factors to show the purchases were consistent with the client's investment wishes and therefore unsolicited: the extended holding periods, the substantial profits realized on the securities sold quickly, and the low commission charged on each purchase. (Canady VA at 7-8.)
The final group of trades that Ms. Canady alleges were unsolicited consists of two purchases on January 26, 1988, of two different Eaton Vance investment funds for which Ms. Canady earned total commissions of $3,260.00. Ms. Canady relies on her testimony at the hearing to prove that she did not solicit these purchases. (Canady VA at 8.)
Division's Response To Verified Accounting of Ms. Canady
The Division contends that Ms. Canady has failed to carry her burden of showing any unsolicited transactions for the Testifying Customers. However, based on its independent analysis, the Division believes that Ms. Christianson Sim's sale of thirty-eight units of John Deere stock on April 8, 1989, commission $50.00, and Mrs. Gruhl's eight purchases of U.S. Treasury securities between January 1, 1988, and December 21, 1989, total commissions $504.00, were unsolicited trades. (Div. Resp. at 2, 8, 10.) Because of these unsolicited transactions, the Division would reduce the disgorgement amount by a total of $554.00
The Division argues that Ms. Canady lacks credibility based, in part, on her many inconsistent claims as to what trades were unsolicited and her failure to explain these "blatant inconsistencies." (Div. Resp. at 2-12.) The Division also cites Judge Lawrence's many findings that Ms. Canady gave sworn testimony that was not credible at the hearing in the underlying proceeding. (Div. Resp. at 6-7, 10.) The Division cites Rule 608(b) of the Federal Rules of Evidence and Golden Rule Insurance v. Strauss, 888 F. Supp. 59, 62 (E.D. La. 1995), for the proposition that it is relevant in assessing the weight to be accorded a person's testimony that the person lied previously under oath. (Div. Resp. at 7.)
Carolyn M. Campbell
The Division cites the following as examples of Ms. Canady's inconsistent claims with respect to Ms. Campbell:
The Division objects to allowing in evidence four "newly-discovered" trade tickets that Ms. Canady offers to show that seven transactions were unsolicited. (Div. Resp. at 3.) The Division characterizes the trade tickets as unreliable hearsay. (Div. Resp. at 6.) It argues that Ms. Canady has not shown the trade tickets to be authentic. (Div. Resp. at 6.) It questions why Ms. Canady did not introduce these trade tickets at the hearing and it questions their authenticity because the Merrill Printout shows that the transactions occurred on dates different from the trade dates on the tickets. (Div. Resp. at 6.) Finally, the Division argues that because she was churning her customer accounts, Ms. Canady likely marked the trade tickets unsolicited to hide her illicit conduct from her employer. (Div. Resp. at 6.) In support of its position, the Division cites Judge Lawrence's finding that Ms. Canady did not accurately enter Ms. Christianson Sim's investment objectives on her account sheets. (Div. Resp. at 7 n.3.)
Cynthia Christianson Sim
The Division characterizes Ms. Canady's claim of six unsolicited transactions in Ms. Christianson Sim's account as inconsistent and unconvincing. Ms. Canady claimed in the Offer of Proof that three transactions for Ms. Christianson Sim were unsolicited. (Div. Resp., Exhibit 1.) In her Verified Accounting, Ms. Canady claims six different transactions were unsolicited and she does not explain the discrepancy. (Div. Resp. at 8, Exhibit 1.) The Division argues that Ms. Canady's Offer of Proof, prepared closer to when the transactions occurred, is likely more credible than one prepared twelve years after the transactions occurred. (Div. Resp. at 2.) Moreover, Ms. Canady specifically stated in her Offer of Proof that she solicited Ms. Christianson Sim's purchase of Merrill Lynch's Basic Value Fund Class A on June 29, 1989. (Div. Resp., Exhibit 1 at 4.) Without any explanation, Ms. Canady now claims in her Verified Accounting that this purchase by Ms. Christianson Sim was unsolicited. (Div. Resp. at 9.)
The Division claims that Ms. Canady is making the same argument here that Judge Lawrence rejected; namely that Ms. Christianson Sim's four purchases of municipal trust units, MIT SR 6 and 9 MPS, on April 29, 1988, and May 2, 1988, respectively, were unsolicited trades because Mr. Leslie suggested that Ms. Christianson Sim make the purchases. (Div. Resp. at 9.)
Richard and Mary Gruhl
The Division agrees that $504.00, the total commissions on eight unsolicited U.S. Treasury bond purchases by the Gruhls, should be deducted from the disgorgement amount based on Mary Gruhl's testimony that "I'm sure that we suggested the treasury bonds because we knew they were very secure." (Div. Resp. at 10-11, Exhibit 7 at 5.)
In addition, the Division maintains that the first three trades that Ms. Canady identified were purchased before January 1, 1988, and that the commissions that Ms. Canady earned on those transactions were not included in the disgorgement amount because the Order Instituting Proceedings alleged that Ms. Canady defrauded her clients from approximately January 1988 through February 1990.8 (Div. Resp. at 11.)
The Division contends that Mrs. Canady has not shown that the remaining two trades of the thirteen identified in her Verified Accounting were unsolicited. The Division relies on Mrs. Gruhl's unequivocal testimony that Ms. Canady recommended the purchase of the Eaton Vance fund to refute Ms. Canady's claim that the Gruhls purchases of the Eaton Vance High Income fund and Eaton Vance High Yield Municipal fund on January 26, 1988, were unsolicited trades. (Div. Resp. at 12, Exhibit 7.) The Division argues that the Commission's finding that Ms. Canady did not control the Gruhls account does not invalidate Judge Lawrence's finding that Ms. Canady traded Eaton Vance funds in the Gruhls' account without advising them. (Div. Resp. at 12.)
Ms. Canady's Reply in Support of Verified Accounting
Ms. Canady summarizes the Division's position as: (1) Ms. Canady's circumstantial evidence should be ignored because she is not credible; (2) transactions not included in Ms. Canady's Offer of Proof should be ignored; and (3) Ms. Canady's evidence should be ignored for technical reasons despite its "obvious credibility." (Canady Reply at 1.)
Carolyn M. Campbell
Ms. Canady maintains that the trade tickets she was able to locate for the seven trades she maintains were unsolicited are "unique documentary evidence," and that the Division's argument that the tickets appear not to be authentic is a complete "red herring" inasmuch as the trade date of a transaction appears on the trade ticket and the settlement date appears on the account statement. (Canady Reply at 5-6.) Ms. Canady maintains that the trade tickets come within the business records exemption to the prohibition on hearsay and "therefore would be admissible for the truth of the matter asserted therein. See Fed. R. Civ. Proc. 803(6)." (Canady Reply at 6-7.) Ms. Canady argues that there is not a shred of evidence that she falsified a trade ticket. (Canady Reply at 7.) Ms. Canady also contends that the disgorgement amount should be reduced by $3,871.94 based on the trade tickets. (Canady Reply at 7.)
Cynthia Christianson Sim
Ms. Canady claims that the Division's acknowledgement that Ms. Christianson Sim's made an unsolicited purchase of thirty-eight shares of John Deere common stock on April 8, 1989, is a concession that there are unsolicited transactions that Ms. Canady did not identify in the Offer of Proof, and reveals a fallacy in the Division's major objection to her accounting. (Canady Reply at 2 n.1, 6.) Furthermore, Ms. Canady argues that the Offer of Proof submitted by the attorneys who represented her in 1995 "does not purport to be complete and exclusive, and [she] did not sign, verify or otherwise authenticate the document." (Canady Reply at 6.)
Ms. Canady denies that Judge Lawrence rejected her claim that Mr. Leslie suggested Ms. Christianson Sim make the four purchases of a municipal investment trust, "MIT SR 6 MPS." (Canady Reply at 2-3.) Ms. Canady believes the disgorgement amount should be reduced by $5,594.40 inasmuch as the evidence establishes that "these trades were Mr. Leslie's idea." (Canady Reply at 3.)
Furthermore, Ms. Canady insists that the circumstantial evidence establishes that Mr. Leslie also recommended that Ms. Christianson Sim purchase the Merrill Lynch Basic Value Fund so that trade was unsolicited and the disgorgement amount should be reduced by $425.25.
Richard and Mary Gruhl
Ms. Canady accepts the Division's position that: (1) the disgorgement amount does not include commissions on three of the thirteen transactions in the Gruhls account that it alleges were unsolicited; and (2) the remaining seven purchases of U.S. Treasury securities were unsolicited. (Canady Reply at 4.)
Ms. Canady insists that the two purchases by the Gruhls of the Eaton Vance funds were unsolicited trades and cites her testimony in the underlying proceeding for support. (Canady Reply at 5.) Ms. Canady argues that the Division's reliance on Judge Lawrence's finding that Ms. Canady made these trades without the Gruhls' knowledge both contradicts and ignores the Commission's finding that Ms. Canady did not control the Gruhls' account. (Canady Reply at 3-5.)
Findings of Fact and Conclusions of Law
I find it relevant in considering Ms. Canady's unsupported assertions that she has made differing claims that different transactions were unsolicited trades. Compare her Offer of Proof, her February 25, 2001, letter to Mr. Kohn, and the Verified Accounting she filed on October 12, 2001.9 (Div. Resp. at 3-4, 8, Exhibits 1, 3.)
Alleged Unsolicited Trades | |||
| Campbell | Christianson Sim | Gruhl | |
| Offer of Proof April 5, 1995 | 1 | 3 | 0 |
| Letter to Mr. Kohn
February 25, 2001 | 2 different trades from Offer of Proof | 6 different trades from Offer of Proof | 13 |
| Verified Accounting October 12, 2001 | 7 including five new trades | 6 same trades | 13 |
I applied a preponderance of the evidence standard to the parties' submissions and concluded that Ms. Canady did not show through an accounting, or by any other means, that the disgorgement amount of her ill-gotten gains should be reduced from $23,624.00, because it included commissions earned on unsolicited trades.10 See Steadman v. SEC, 450 U.S. 91, 102 (1981). I considered all the arguments advanced by the parties and rejected those that are inconsistent with this decision.
In her Verified Accounting, Ms. Canady argues that the trades she identified were unsolicited based on her testimony in the underlying proceeding and circumstantial evidence. She also produced four newly discovered trade tickets that are not in the evidentiary record. I find that Ms. Canady did not submit an accounting within the generally accepted definition of that term, and the material she submitted and the arguments she made are unpersuasive for the following reasons.
Generally:
An "accounting" is defined as an adjustment of the accounts of the parties and a rendering of a judgment for the balance ascertained to be due. An action for an accounting usually invokes the equity powers of the court, and the remedy that is most frequently resorted to, for the purpose of securing or compelling an accounting or to secure an adjustment of complicated accounts, is by way of a suit in equity. (footnotes omitted.)
1 Am. Jur. 2d, Abandoned, Lost, and Unclaimed Property § 52 (1994). Another definition of an accounting is "The act or a system of establishing or settling financial accounts; esp., the process of recording transactions in the financial records of a business and periodically extracting, sorting, and summarizing the recorded transactions to produce a set of financial records. - Also termed financial accounting." Black's Law Dictionary 19 (7th ed. 1999). This emphasis on documentation is echoed in the description offered in the Encyclopedia of Banking and Finance, "The organized, systematic recording of all transactions having any bearing on the financial status of a business enterprise." Glenn Mann, Encyclopedia of Banking and Finance 7 (1949). Also useful is a definition developed by an American Accounting Association committee, "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information." Anthony N. Robert, Accounting Text & Cases 7 (1999).
Ms. Canady's presentation is unconvincing when each trade is considered individually.
Carolyn M. Campbell
Ms. Canady alleges that seven transactions in Campbell's account were unsolicited.
Ms. Canady's claim that a single trade ticket provides "compelling evidence" that two purchases by the Campbell account almost two months apart in Eaton Vance High Income Fund were unsolicited is implausible for several reasons. (Canady VA at 9.) First, it is impossible to read the ticket to discern information that would indicate it is for a purchase of the Eaton Vance High Income Fund. (Canady VA, Exhibit D at 4.) Ms. Canady states that the "quality of the [trade ticket] photocopy is admittedly not good." (Canady VA at 9.) However, for something to have meaning it must be readable and it is impossible to read the trade ticket that Ms. Canady relies upon, including the word unsolicited that she alleges appears on the trade ticket. (Canady VA, Exhibit D at 4.) Second, Ms. Canady asserts that "these two transactions appear in the [Merrill Printout] in the Campbell Materials as two separate purchases because the securities were later sold in two partial sales." (Canady VA at 9.) However, Ms. Canady offers no documentation to support her assertion.
Similarly, Ms. Canady has not established that five purchases of UITs identified as "CIF HI YLD SER" 17, 2, 10 or "236th MPS" were unsolicited trades based on three trade tickets marked unsolicited that she "was able to locate." (Canady VA at 10, Exhibit D at 5, 6, 7.) I accept Ms. Canady's explanation that the dates on the trade ticket vis-à-vis the Merrill Printout could be different because the trade date appears on the ticket while the settlement date appears on the Merrill Printout. However, that in and of itself does not establish either that these tickets matched those purchases or that these purchases were truly unsolicited. Ms. Canady offers no explanation how or why she was able to locate three trade tickets six years after the evidentiary hearing concluded. In 1988, Ms. Campbell was a recently widowed high school graduate about seventy years of age who was not knowledgeable about investments and who trusted Ms. Canady. See Canady, 60 SEC Docket at 1928-29; Canady, 69 SEC Docket at 1472. The Commission found Ms. Canady controlled the Campbell account and that as to UITs, the type of security at issue here:
Canady used her authority over Campbell's accounts to engage in short-term, speculative trading of UITs. For example, on September 1, 1988, Canady sold in Campbell's CMA 30 units of Corporate Income Fund High Yield Series 10 for $23,775 that she had bought on margin on August 4, 1988, for $25,536. The prospectus for the CIF High Yield Series 10 described the security as "speculative." A week before the Series 10 sale, on August 23, 1988, Canady bought for Campbell 47 units of a similar UIT, CIF High Yield Series 9, for $44,147. Canady sold Campbell's Series 9 holdings in March 1989 for $33,972.
Canady, 69 SEC Docket at 1472.
When Ms. Canady testified at the hearing in 1995, she could not identify any unsolicited trades on Ms. Campbell's account statements that covered the time period of April 1988 through September 1989. Now Ms. Canady takes a contrary position in her Verified Accounting with a claim that six unsolicited trades occurred in this time period. (Div. Resp. at 4, Exhibit 4.)
The Commission put the burden on Ms. Canady to establish by an accounting that she received commissions from unsolicited trades. Canady, 69 SEC Docket at 1496. She has not carried that burden.11 For all these reasons, Ms. Canady has not shown by an accounting or by persuasive evidence that seven trades in Ms. Campbell's account were unsolicited.
Cynthia Christianson Sim
Ms. Canady alleges that six trades in Ms. Christianson Sim's account were unsolicited.
The Division agrees that one of the six trades, the sale of thirty-eight shares of John Deere common stock on March 8, 1989, for a commission of $50.00, was an unsolicited transaction.
I reject Ms. Canady's claim that Ms. Christianson Sim's four purchases of a municipal investment trust on April 29 and May 2, 1988, and her single purchase of the Merrill Lynch Basic Value Fund on June 29, 1989, were unsolicited based on the circumstances surrounding the transactions and Ms. Canady's prior testimony. Ms. Canady offers no documentation to support her claim that another person persuaded Ms. Christianson Sim to make these purchases. The factors that Ms. Canady cites, the small quantities of shares traded and the small commissions earned, do not by themselves always indicate unsolicited trades. Moreover, any indicative qualities that these factors may have are lessened by the fact that Ms. Canady controlled the account when the trades occurred. See Canady, 69 SEC Docket at 1477.
I accord Ms. Canady's unsupported testimony no weight in view of the repeated findings that she did not give credible testimony, and her many unexplained changes of position.12 See Canady, 60 SEC Docket at 1917-18, 1920, 1924, 1926-27, 1929, 1932, 1936-37, 1941, 1945, 1947, 1949; see also Anthony Tricarico, 51 S.E.C. 457, 460 (1993) ("It is well settled that credibility determinations of an initial fact finder are entitled to considerable weight because they are based on hearing the witnesses' testimony and observing their demeanor. Such credibility determinations can be overcome only where the record contains "substantial evidence" for doing so.") In the Offer of Proof, Ms. Canady admitted that Ms. Christianson Sim's purchase of the Merrill Lynch Basic Value Fund on June 29, 1989 was solicited. (Div. Resp., Exhibit 1 at 4.) However, in the Verified Accounting, she represents, without any explanation, that her earlier statement was "simply a mistake" by her prior counsel. (Canady Reply at 3.)
For all the reasons stated, I find that Ms. Canady has failed to carry her burden of proof with an accounting or with any persuasive evidence.
Richard and Mary Gruhl
Ms. Canady alleges that thirteen transactions in the Gruhl account were unsolicited. However, the status of only two of those transactions remains at issue. This is because Ms. Canady accepts the Division's representation that no commissions were included in the disgorgement amount as a result of the first three transactions that she claimed were unsolicited. (Canady Reply at 4.) In addition, the Division agrees that the disgorgement should be reduced by $504.00 based on Mary Gruhl's testimony that eight purchases of U.S. Treasury securities were solicited.13 The result is that the status of eleven of the thirteen contested transactions has been resolved.
Ms. Canady did not show by an accounting that the two purchases of the Eaton Vance funds were unsolicited. As in several other situations, she did not even attempt to do so, but rather she reargued the findings in a manner similar to an appeal or a petition for reconsideration. Ms. Canady is being disingenuous to argue that her testimony and the circumstances of the trades establish that these purchases were unsolicited when she knows Mrs. Gruhl gave persuasive testimony at the hearing that she did not request these trades.
Q. Mrs. Gruhl, of the treasury bonds, the stocks, the municipal investment trusts and Eaton Vance, who, if anyone, suggested the purchase of those securities in your account?
A. I'm sure that we suggested the treasury bonds because we knew they were very secure. We didn't suggest the MITs or the Eaton Vance because we had never heard of them. We didn't even know what they were. . . .
Q. And the MITs and the Eaton Vance, who suggested the purchase of those in your account?
A. Laurie Canady
(Div. Resp., Exhibit 7 at 4-5.)
Finally, Ms. Canady is incorrect that the Commission's finding that Ms. Gruhl controlled the account nullifies Judge Lawrence's finding that the Gruhls did not understand the risk involved in the Eaton Vance funds and that Ms. Canady made unauthorized trades in their account. See Canady, 60 SEC Docket at 1935, 1937. The two findings are compatible. In fact, even though the Commission found that Ms. Gruhl controlled the account, the Commission found that Ms. Canady's purchase of a zero-coupon bond for the account in the fall of 1989 was unauthorized. See Canady, 69 SEC Docket at 1484.
For all the reasons stated, I find that Ms. Canady has failed to show any unsolicited transactions by an accounting or any other persuasive evidence. I accept the Division's position and find that Ms. Canady should disgorge $23,070.00, a reduction of $554.00 from the amount the Commission ordered on April 5, 1999, with prejudgment interest of $27,598.00, and with post-judgment interest to November 30, 2001, of $6,615.00.14 (Div. Resp. at 2, 8, 10, Exhibit 9) Ms. Canady did not take issue with the interest calculations that the Division presented in its filing. (Canady Reply.)
Ms. Campbell was seventy-six years of age in 1995 and she and Ms. Christianson Sim were widows. See Canady, 60 SEC Docket at 1924, 1928. In 1988, Ms. Christianson Sim's two children were age seven and nine. Canady, 60 SEC Docket at 1924. Mr. Gruhl suffered a stroke in 1986 that left him physically incapacited and mentally impaired. See Canady, 60 SEC Docket at 1934. These investors have been waiting since 1995 to receive a portion of the disgorgement ordered. (Tr. 14.) Equity requires that disgorgement be accomplished without further delay. However, the Commission's Order does not contain any summary procedures.
Order
I ORDER that Laurie Jones Canady disgorge $23,070.00, representing the commissions she received for trading in the accounts of Carolyn Campbell, Cynthia Christianson Sim, Evelyn Fasbender, and Mary and Richard Gruhl in 1988 and 1989, plus prejudgment interest of $27,598.00, determined in conformity with 26 U.S.C. § 6621(a)(2) from February 20, 1990, to April 5, 1999, and post-judgment interest of $6,615.00 to November 30, 2001.
Ms. Canady shall pay disgorgement by certified check, United States postal money order, bank cashier's check, or bank money order made payable to the United States Securities and Exchange Commission as soon as possible but not later than the first day following the day this decision becomes final. Payment shall be delivered by hand or courier to the Comptroller, United States Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312, with a cover letter identifying Laurie Jones Canady as a Respondent in Administrative Proceeding No. 3-8531 D. Ms. Canady should send a copy of the cover letter and check to Jerrold H. Kohn, Branch of Enforcement, United States Securities and Exchange Commission, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661.
Pursuant to Rule 17(f) of the Commission's Rules of Practice in effect in 1994, 17 C.F.R. § 201.17 (1994), this Initial Decision shall become the final decision of the Commission as to each party who has not, within fifteen days after service of the Initial Decision, filed a petition for review pursuant to Rule 17(b), unless the Commission, pursuant to Rule 17(c), determines on its own initiative to review this Initial Decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the Initial Decision shall not become final as to that party.
______________________________
Brenda P. Murray
Chief Administrative Law Judge
| 1 | I will use the following abbreviated references: Ms. Canady's Verified Accounting is "(Canady VA at __.)," the Division's Response is "(Div. Resp. at __.)," and Ms. Canady's Reply is "(Canady Reply at __.)." I will also refer to the transcript of a posthearing conference held August 29, 2001 as "(Tr. __.)." A second posthearing conference on September 28, 2001, was not transcribed. |
| 2 | Ms. Canady, who was pro se at the time, believes that she sent the Office a copy of her submission. (Tr. 8.) The Office has no record of receiving a copy. |
| 3 | This same person is referred to as Cynthia Christianson Sim and Cynthia Christianson. |
| 4 | Exhibit 1 is Ms. Canady's Offer of Proof Regarding Unsolicited Trades dated April 5, 1995. Exhibit 2 is a portion of the transcript of the hearing in the underlying proceeding from March 22, 1995. Exhibit 3 is Ms. Canady's letter to Mr. Kohn dated February 25, 2001, enclosing the accounting of unsolicited trades. Exhibit 4 is a portion of the transcript of the hearing in the underlying proceeding from March 16, 1995, and an Appendix A that is a printout of account records. Exhibit 5 is a portion of the transcript of the hearing in the underlying proceeding from March 9, 1995. Exhibit 6 is a portion of the transcript of the hearing in the underlying proceeding from March 10, 1995. Exhibit 7 is a portion of the transcript of the hearing in the underlying proceeding from March 14, 1995. Exhibit 8 is a copy of the Gruhls' account statement. Exhibit 9 is a calculation of interest. |
| 5 | Ms. Canady accepts that three commissions in the Gruhls' account totaling $1,645.78 were not included in disgorgement because the purchases were made before January 1, 1988. (Canady Reply at 4.) In her Verified Accounting, Ms. Canady claimed that disgorgement should be reduced by $15,351.37. However, if you deduct $1,645.78 from $15,351.37, the result is $13,705.59. Ms. Canady does not explain how she arrived at $13,642.59. |
| 6 | Ms. Canady's Verified Accounting contains several errors. For example, the reference to CIF HI YLD SER 7 on pages 8 and 9 of her Verified Accounting should be to CIF HI YLD SER 17. (Canady VA at 9, Exhibit D at 3.) Also, the citations to the Merrill Printout on pages 9 through 11 should be to Canady VA, Exhibit D at 3, and not to page 2. (Canady VA at 9-11.) The date on the trade ticket at Canady VA, Exhibit D at 5 is May 18, 1988, not May 15, 1988. (Canady VA at 10.) |
| 7 | The Division notes that Ms. Canady's testimony at the hearing on March 16, 1995, is consistent with her Offer of Proof. (Div. Resp. at 4-6.) |
| 8 | The Merrill Printout describes the three securities as: "ALTUS MOBLE AL CD 6.8% 2/24/88," "ML MCPL BD FD HI YLD," and "US TSY 9.5% 11/15/95." (Canady VA, Exhibit C at 1, lines 1, 5, 6.) |
| 9 | I disagree with Ms. Canady's counsel who argues that Ms. Canady was not responsible for the "erroneous" Offer of Proof submitted by her prior legal representatives. (Canady Reply at 3.) |
| 10 | I did not enlarge the evidentiary record compiled in the underlying proceeding. |
| 11 | I reject Ms. Canady's claim that copies of three unsolicited trade tickets are persuasive evidence that a fifth trade in the same time period was unsolicited. (Canady VA at 11.) |
| 12 | See Canady, 69 SEC Docket at 1480-81 ("This record affords us no reason to reject the law judge's credibility determinations."). |
| 13 | The commission per transaction was $63.00. |
| 14 | The Division followed the Commission's model and calculated prejudgment interest from February 20, 1990, the last day Merrill employed Ms. Canady, through the date of the Commission's Order on April 5, 1999. See Canady, 69 SEC Docket at 1496. (Div. Resp., Exhibit 9.) The Division calculated post-judgment interest through November 30, 2001, to be $6,615.00 (Div. Resp., Exhibit 9.) |
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