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Broker and Supervisor Liable for Customer Conduct

Failing to Stop Wash Sales and Matched Orders Leads to Disciplinary Proceedings

By John M. Baker, Esq.


The U.S. Court of Appeals for the D.C. Circuit on Friday affirmed an SEC order finding a registered representative and her supervisor responsible for a customer’s improper trades. Graham v. SEC, No. 99- 1029 (Aug. 18, 2000).

The financially strapped customer entered a long series of wash sales and matched orders between margin accounts that he owned or controlled at various brokerages. He then was able to obtain the sale proceeds as the seller on the next business day, but did not have to pay for the securities as the buyer until (under the rules then in effect) five business days after the transaction.

Over the course of time, his registered representative and her supervisors at one introducing firm were able to infer the existence of this scheme, which the court compared to check-kiting.

The D.C. Circuit concurred in the SEC finding that the scheme violated Rule 10b-5, that the registered representative aided and abetted the scheme, and that the brokerage’s owner and president failed reasonably to supervise her.

The representative argued that, because her supervisor had approved the trades and instructed her to put them through, she had no real discretion. The D.C. Circuit gave this argument short shrift, saying that a registered representative has responsibilities comparable to those of lawyers and accountants, and can always refuse to execute a trade she knows may constitute a securities violation. “Of course, doing so might have made Graham’s career at VCI more difficult, but fear of such consequences does not excuse a violation of the securities laws.”

The court distinguished this case from others in which reliance on others’ opinions were held to be reasonable, saying that the existence of numerous red flags gave rise to the necessary scienter.

The court’s opinion is available online at http://pacer.cadc.uscourts.gov/common/opinions/200008/99-1029a.txt


Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.


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