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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 38440 / March 26, 1997
Admin. Proc. File No. 3-8986
-------------------------------------------------
:
In the Matter of the Application of :
:
CHRISTOPHER J. BENZ :
300 California Avenue, #16 :
Santa Monica, California 90403 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.:
:
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OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY
PROCEEDINGS
Violations of Rules of Fair Practice
Where branch manager of member firm of registered securities
association failed adequately to supervise registered
representative and failed to enforce the firm's supervisory
procedures, held, association's findings of violation and
the sanctions it imposed sustained.
APPEARANCES:
Peter A. Benz, of Applegate, Quinn & Magee, for Christopher
Benz.
Alden Adkins and Deborah McIlroy, for NASD Regulation, Inc.
Appeal Filed: April 15, 1996
Briefing Completed: July 24, 1996
I.
Christopher Benz, formerly manager of the Los Angeles branch
office of Gilford Securities, Inc. ("Gilford"), a member of the
National Association of Securities Dealers, Inc. ("NASD") appeals
from NASD disciplinary action. The NASD found that Benz violated
Article III, Sections 1 and 27 of the NASD Rules of Fair Practice
("Rules") in that Benz failed adequately to supervise a
registered representative of Gilford and failed to enforce
==========================================START OF PAGE 2======
Gilford's supervisory procedures. -[1]- The NASD censured
Benz, fined him $7500, assessed costs, -[2]- and required
that Benz requalify as a general securities principal before
again acting in a principal capacity. -[3]- Our findings
are based on an independent review of the record.
II.
In January 1990, Christopher Benz was hired to work on
Gilford's trading desk in New York. -[4]- In July 1991,
Gilford's president and chief executive officer, Ralph
Worthington, asked Benz to become the branch manager of the Los
Angeles office of Gilford. -[5]- In preparation for
assuming the responsibilities of branch manager, Benz spent two
days with Gilford's most senior branch manager who worked at
-[1]- The NASD recently revised and renumbered its Rules
of Fair Practice; no substantive changes were made
to the particular rules at issue here. Article
III, Section 1 of the Rules [new Rule 2110]
requires the observance of high standards of
commercial honor and just and equitable principles
of trade. Article III, Section 27 [new Rule 3010]
requires a member to establish, maintain, and
enforce a supervisory system with written
procedures.
-[2]- The NASD assessed costs of $3,610.75 for the
initial hearing and $750 in appellate costs.
-[3]- The complaint also named as respondents Gilford,
Gilford's president and chief executive officer,
Ralph Worthington, and Elias Argyropolous, the
registered representative whose underlying conduct
was at issue. These three respondents settled
with the NASD. Gilford and its president and
chief executive officer were each censured, and
fined $30,000. Gilford further agreed to improve
and publish internally the firm's amended
supervisory procedures. The registered
representative's settlement resulted in a censure,
a bar in all capacities, and a $200,000 fine (with
collection efforts on the fine suspended unless
and until he seeks to become associated with a
member firm).
-[4]- Prior to his position at Gilford, Benz had worked
with Thompson McKinnon Securities, Inc. for a year
and assisted his brother at another brokerage
house, R.H. Damon, for approximately six months.
-[5]- Benz was to receive a salary of $2000 per month,
as well as an override of 50% of the office
profits.
==========================================START OF PAGE 3======
Gilford's Connecticut office, had conversations with Gilford's
financial staff, and passed the NASD's Series 24 principal
examination. Benz also had several conversations with
Worthington about the Los Angeles office, which Worthington
characterized as "kind of a mess." Worthington warned Benz that
one registered representative in the Los Angeles office, Elias
Argyropolous, could be "tricky" and could cause headaches.
Benz commenced his duties as branch manager in August 1991.
Benz began to be concerned about Argyropolous's activities in
March 1992 when Benz received a subpoena from this Commission
related to trades made by Argyropolous. Benz also noticed
unusually high numbers of margin calls in the accounts of
Argyropolous's clients. Benz contacted Worthington, who told
Benz to monitor the situation.
Between March and December 1992, Benz received more customer
complaints about Argyropolous, as well as document requests from
different stock exchanges relating to Argyropolous's accounts.
Benz discussed the complaints with Worthington and with
Argyropolous. Benz continued to see unusual margin activity in
Argyropolous's accounts.
In December 1992, Benz drafted a memo to Worthington
detailing his concerns about Argyropolous's activities. Benz
noted, for example, that Argyropolous "continually over-
purchased" for his clients and that his clients were not meeting
their "house" margin calls. As a result, many of Argyropolous's
customers' accounts were being liquidated. Benz also suggested
that Argyropolous's clients were not aware of the "illegality or
potential consequences" of not meeting their margin calls. Benz
stated his belief that Argyropolous was engaging in free-riding
in an attempt to make up for earlier losses suffered by his
clients. As a result of this memo, Worthington called
Argyropolous to New York for a meeting, at which time
Argyropolous assured Worthington that he would pay closer
attention to the correct handling of his accounts.
When Benz returned from a holiday vacation in early January
1993, he discovered that Argyropolous had made a large number of
purchases in yet another stock while he was gone and that some of
the accounts of Argyropolous's clients were heavily margined. He
notified Worthington who advised him to ensure that the customers
were going to pay for the trades. -[6]-
-[6]- The NASD found that Argyropolous engaged in a wide
variety of sales practice abuses and manipulative
and deceptive devices during the time that Benz
was his supervisor, including unauthorized trades,
unsuitable recommendations, sharing losses with
customers, guaranteeing customers against losses,
and engaging in wash sales and matched orders.
==========================================START OF PAGE 4======
In early July 1993, Benz notified Worthington that he was
resigning and left the firm a few weeks later.
III.
Article III, Section 27 of the Rules requires a member to
establish, maintain, and enforce a supervisory system with
written procedures. Each registered representative must be
adequately monitored by a supervisor.
Benz does not assert that he took sufficient action to meet
these requirements. Rather, Benz contends that, although his
title was "branch manager," he merely reported to Worthington,
who actually controlled the Los Angeles office from New
York. -[7]- The record does not support this contention.
Benz performed the functions of a branch manager including: 1)
reviewing order tickets, account statements, brokers' family-
related accounts, and margin activity; 2) approving new accounts;
3) reviewing and responding to customer complaints; and 4)
approving cross-trades in customer accounts. He also admitted
that he reviewed incoming mail for the office, and he held
himself out in correspondence as the branch manager.
Benz further contends that he could not have discovered
Argyropolous's violations. -[8]- There were numerous red
flags, however, that Benz should not have ignored. Before Benz
commenced his duties as branch manager, Worthington warned Benz
that Argyropolous was "tricky." We have held that firms must
more closely monitor registered representatives who have a
history of compliance problems. -[9]- Benz received a
subpoena from this Commission in March 1992, and, in the next few
months, other document requests from different self-regulatory
organizations, all investigating Argyropolous's activities. It
is apparent from the memorandum that Benz drafted in December
1992 that he had been aware for some time of suspicious
activities in Argyropolous's accounts -- such as numerous margin
-[7]- Benz contends that, because Argyropolous produced
large revenue for Gilford, Worthington was
unwilling to supervise him too closely.
-[8]- Argyropolous did attempt to conceal some of his
misconduct by, for example, writing personal
checks to customers and having them, in turn, re-
issue checks to Gilford to cover losses in their
accounts.
-[9]- Douglas Conrad Black, 51 S.E.C. 791, 795 (1993)
(where registered representative had already
presented compliance problems, firm required to
more closely monitor him); Houston A. Goddard, 51
S.E.C. 668, 672 (1993) (same).
==========================================START OF PAGE 5======
calls in, -[10]- and numerous liquidations of,
Argyropolous's customers' and his own accounts. -[11]-
Benz testified that he reviewed account statements for the
relatives of Argyropolous; these statements reflected
insufficient funds to pay for the transactions that occurred in
the accounts, numerous transfers among the family accounts, and
several new accounts being opened for family members. Moreover,
at least two of Argyropolous's customers sent complaint letters
to Gilford's Los Angeles office. -[12]- Rather than ignore
these "red flags," Benz should have more closely monitored
Argyropolous's accounts. -[13]- Benz failed to take any
steps to heighten his scrutiny of Argyropolous.
Benz further argues that he did not have authority to
supervise Argyropolous and that he could not fire him without
Worthington's approval. Firm officials, however, can be
responsible for a failure to supervise even if they lack the
-[10]- Benz admitted that Argyropolous had the largest
margin calls he had ever seen.
-[11]- Benz testified that he reviewed trading tickets
daily and active accounts on a monthly basis, as
well as reviewing margin calls.
-[12]- One customer sent a letter on December 26, 1992
complaining of an unauthorized trade in his
account. Another customer sent a letter dated
January 18, 1993 in which he complained that
Argyropolous had not complied with his order to
sell certain stock. Benz contends that both
letters were addressed to Argyropolous and that he
did not see them. Benz was required, as part of
his duties, to review all incoming correspondence,
and he admits that he generally reviewed such
correspondence. He does not explain how these two
letters circumvented his procedures for examining
all correspondence received by Gilford's Los
Angeles office.
-[13]- Houston A. Goddard, 51 S.E.C. at 668 (sustaining
sanctions imposed on principal and compliance
officer of member firm who failed to adequately
follow up on red flags); Edwin Kantor, 51 S.E.C.
440, 447 (1993) ("Red flags and suggestions of
irregularities demand inquiry as well as adequate
follow-up and review"); Kirk A. Knapp, 50 S.E.C.
858, 862 (1992) (president of brokerage firm is
responsible for compliance unless and until he
reasonably delegates a particular function to
another member of the firm and neither knows nor
has reason to know that such person is not
properly performing his duties).
==========================================START OF PAGE 6======
ability to hire and fire. -[14]- Worthington testified
that Benz had authority to hire and fire all employees in the Los
Angeles branch office. -[15]- Moreover, Benz admitted in
his testimony before the NASD that he had authority to supervise
the remaining registered representatives -- other than
Argyropolous -- in the Los Angeles office. -[16]- The NASD
did not credit Benz's assertions that he did not have authority
to supervise Argyropolous properly, and we find no reason to
question its credibility determination. -[17]-
Benz also argues that Gilford failed to give him any written
supervisory procedures to follow and that, therefore, he was
unaware of his obligations. Article III, Section 27 of the Rules
requires member firms to maintain written procedures, and Benz
should have been aware of this requirement. -[18]-
Moreover, although Benz testified that he did not receive any
compliance manual or written procedures, he signed a document
attesting to his receipt of part of Gilford's compliance manual
and admitted that he had discovered pages from a procedures
manual in the Los Angeles office. Benz's allegation that he was
-[14]- See Conrad C. Lysiak, 51 S.E.C. 841, 844 (1993),
aff'd,
47 F.3d 1175 (9th Cir. 1995) (unpublished opinion).
-[15]- Worthington noted, however, that he would have
wanted notice before someone as senior as
Argyropolous was fired. Benz asserts that
Worthington shaded this testimony in order to
obtain a good settlement of the NASD's
disciplinary action against Worthington and
Gilford. Regardless of whether Benz had authority
to hire and fire, he was responsible for
adequately supervising Argyropolous.
-[16]- Steve Dirks, the former branch manager of the Los
Angeles office, testified that he understood that
he had supervisory responsibility over the
brokers.
-[17]- We have repeatedly held that credibility
determinations made by the initial decision maker
are entitled to "considerable weight" since they
are based on "hearing the witnesses' testimony and
observing their demeanor." E.g., Jonathan Garrett
Ornstein, 51 S.E.C. 135, 137 (1992).
-[18]- At the very least, Benz should have been aware of
the need for compliance and procedures manuals
from his preparation for and taking of the Series
24 examination for general security principals,
which deals with, among other things,
responsibility under Article III, Section 27 of
the Rules.
==========================================START OF PAGE 7======
unaware of the firm's compliance manual and procedures is not
credible.
The NASD alleged that Benz, among other things, failed "to
reasonably supervise" Argyropolous. We find no merit in Benz's
contention that the concept of "reasonable supervision" is not
defined and is unconstitutionally vague. The standard of
"reasonableness" is determined based on the particular
circumstances of each case. -[19]- As described above, we
have concluded that Benz did not behave reasonably in the face of
the numerous red flags present. Moreover, to claim that a
requirement is void for vagueness, the claimant must demonstrate
that he did not have fair notice of the conduct or activities
proscribed or covered by the requirement. -[20]- Although
Benz claims that he did not understand what was required of him
as branch manager, the record reflects that he was in fact
familiar with and performed many of the required duties. Indeed,
he identified areas of Argyropolous's activities that concerned
him. He failed, however, to take appropriate action.
Nor are we persuaded by Benz's claim that his due process
rights were violated because two hearing officers at the hearing
before the Market Surveillance Committee were also participants
in the decision to file a complaint. Courts and this Commission
have repeatedly rejected similar contentions. -[21]-
IV.
Benz claims that the sanctions imposed by the NASD are too
severe. He argues that he was young and inexperienced, that he
was not adequately trained for the position, and that he had no
prior history of misconduct. The NASD, however, took these
-[19]- See Consolidated Investment Services, Inc.,
Securities Exchange Act Rel. No. 36687 (January 5,
1996), 61 SEC Docket 20; Rita H. Malm, Securities
Exchange Act Rel. No. 35000 (November 23, 1994),
58 SEC Docket 121.
-[20]- City of Mesquite v. Aladdin's Castle, Inc., 455
U.S. 283, 289 (1982); Grayned v. City of Rockford,
408 U.S. 104, 108 (1972). See also R.B. Webster
Investments, Inc., 51 S.E.C. 1269, 1274 n.20
(1994).
-[21]- Cf., Blinder, Robinson & Co. v. SEC, 837 F.2d
1099, 1106 (D.C. Cir. 1988) (no violation of due
process when agency approves filing of complaint
and then participates in ensuing hearings), cert.
denied, 488 U.S. 869 (1988); Pittman & Company,
Inc., 47 S.E.C. 68, 70 (1979) (rejecting claim
that respondents were denied due process because
the chair of the panel who signed the complaint
also participated in adjudication of the case).
==========================================START OF PAGE 8======
factors into account in assessing sanctions against Benz.
-[22]-
Benz contends that the fine imposed on him is unfair in
light of the sanctions imposed on Gilford and Worthington.
-[23]- It is well recognized that the appropriate sanction
depends upon the facts and circumstances of each particular case
and cannot be determined precisely by comparison with actions
taken in other proceedings or against other individuals in the
same proceeding. -[24]- Moreover, the other respondents
settled this action, and as we have previously stated, "it may be
expected that sanctions in settled cases will differ from those
in litigated cases." -[25]-
Benz also argues that he does not have adequate financial
resources to pay the fine and costs imposed. -[26]- We
understand that the NASD continues to make available an
installment plan under which respondents may pay fines by
executing promissory notes. -[27]- For these reasons, we
-[22]- The fine imposed on Benz is at the low end of the
range of fines suggested by the Sanction
Guidelines. See Sanction Guidelines at 44 (1993).
Moreover, the Sanction Guidelines also suggest a
suspension in a "typical case," and the NASD did
not impose any suspension on Benz.
-[23]- See n.3 supra.
-[24]- See Butz v. Glover Livestock Commission Co., 411
U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856,
858-59 (2d Cir. 1970).
-[25]- Conrad C. Lysiak, 51 S.E.C. at 848.
-[26]- Benz stated that his income for 1994 was only
$26,000 and that he has outstanding student loans.
He did not, however, provide any documentation
regarding his overall financial situation.
-[27]- In 1993, the NASD deleted Section 11 of Schedule A
to its By-Laws which provided for the imposition
of a service charge for installment payments of
disciplinary sanctions. The reason for the rule
change was to permit the NASD to enter into
promissory notes with respondents for the
installment payment of disciplinary sanctions.
Letter to Katherine A. England, Assistant
Director, Division of Market Regulation, from T.
Grant Callery, Vice President and Deputy General
Counsel, NASD, dated October 21, 1992. The NASD
has stated that it wanted "to retain business
flexibility to pursue other methods of securing
(continued...)
==========================================START OF PAGE 9======
do not conclude that the fine and costs are excessive or
oppressive.
An appropriate order will issue. -[28]-
By the Commission (Chairman LEVITT and Commissioners
WALLMAN, JOHNSON, and HUNT).
Jonathan G. Katz
Secretary
-[27]-(...continued)
payments as appropriate or to modify the
promissory note program."
-[28]- All of the contentions advanced by the parties
have been considered. They are rejected or
sustained to the extent that they are inconsistent
or in accord with the views expressed herein.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No.
Admin. Proc. File No. 3-8986
:
In the Matter of the Application of :
:
CHRISTOPHER J. BENZ :
300 California Avenue, #16 :
Santa Monica, California 90403 :
:
For Review of Disciplinary Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.:
:
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED
SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it
is
ORDERED that the disciplinary action taken by the National
Association of Securities Dealers, Inc. against Christopher J.
Benz, and the Association's assessment of costs, be, and they
hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary |
