Endnotes
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1 NASD found that Applicants' conduct violated Securities Exchange Act Section 10(b), 15 U.S.C. § 78j (making it "unlawful for any person . . . to use or employ in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe."); Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5 (prohibiting "in connection with the purchase or sale of any security . . . any device, scheme, or artifice to defraud" or any other "act, practice, or course of business" that "operates as a fraud or deceit."); and NASD Conduct Rule 2120 (prohibiting members from effecting "any transaction in, or induc[ing] the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.").
2 NASD found, and Applicants have not contested, that Applicants violated NASD Rules 2110 and 2210(d)(2)(B) by not disclosing in communications with the public that the Firm made a market in a security that was the subject of a recommendation by the Firm.
3 NASD fined Applicants $50,000 for the manipulative conduct and $1,000 for the violation of public communication rules.
4 The "C" appended to the end of the trading symbol denoted that the company was subject to imminent delisting.
5 Volume moderated after the initial surge of interest: trading in Saf T Lok decreased to 5,024,985 shares on October 13 (the next trading day) and 1,860,133 shares on October 14.
Over the next month the price decreased gradually. Through November 11, Saf T Lok's daily closing prices were between $2.03 and $3.56 with an average of $2.95 per share.
6 Elgindy testified without contradiction that, if the Firm were at the inside offer, the Firm would receive so many orders so rapidly that the Firm's computer system would freeze up.
7 NASD presented unrefuted evidence that the excess spread rule did not apply to securities listed on the Nasdaq Small Cap Market in October 1997.
Elgindy also testified that his workstation warned him when he entered a quotation that violated the excess spread rule. NASD presented evidence that the Nasdaq system did not have the capability to warn users that a quotation violated the excess spread rule. NASD did not address Elgindy's other representations regarding the operation of the Firm's workstation.
8 In October 1997, Key West used SelectNet, a computerized order system operated by Nasdaq that permitted market participants to enter buy or sell orders in Nasdaq securities. A firm using SelectNet could direct its order to a single market maker (a "preferenced" order) or to all market makers (a "broadcast" order).
9 If he chose to execute the order the transaction was completed. If, on the other hand, Elgindy chose to cancel the order, the order would move to a different part of his computer screen, the computer would no longer be frozen, and he would be able to act on the order later.
10 Elgindy did not receive any complaints from brokers whose orders he had not filled. An NASD witness testified that NASD had not received any complaints about Elgindy "backing away" from the Firm's bid.
11 The Firm ultimately lost money on the short sales.
12 NASD did not allege and did not find that Elgindy's press releases were inaccurate in what they reported.
13 The Hearing Panel suspended Elgindy and the Firm for one year, fined each $2,000 for failing to honor the Firm's bids, and fined Elgindy $1,000 for issuing recommendations regarding Saf T Lok without disclosing the Firm's market maker status.
14 The NAC affirmed the Panel's findings that the press releases violated the NASD's rules on public communications because they failed to disclose Key West's status as a market maker in Saf T Lok.
15 Brooklyn Capital & Securities Trading, Inc., 52 S.E.C. 1286 (1997) (quoting Pagel, Inc., 48 S.E.C. 223, 226 (1985), aff'd, 802 F.2d 942 (5th Cir. 1986)).
16 Id. at 1290.
17 See, e.g. GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir. 2001).
18 Brooklyn Capital, 52 S.E.C. at 1290.
19 Michael J. Markowski, Securities Exchange Act Rel. No. 43259 (Sept. 6, 2000), 73 SEC Docket 625, 629 (citing Patten Securities Corp., 51 S.E.C. 568, 574 (1993)), aff'd, 274 F.3d 525 (D.C. Cir. 2001), cert. Denied, 537 U.S. 819 (2002).
20 Swartwood, Hesse, Inc., 50 S.E.C. 1301, 1307 (1992). See also Herpich v. Wallace, 430 F.2d 792, 802 (5th Cir. 1970) (antifraud provisions designed to "encompass the infinite variety of devices that are alien to the 'climate of fair dealing' . . . that Congress sought to create and maintain") (citations omitted).
21 Markowski, 73 S.E.C. Docket at 630.
22 See supra text accompanying n.5.
23 In re Olympia Brewing Company Securities Litigation, 613 F. Supp. 1286, 1292 (N.D. Ill. 1985). See also GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d at 205 (proof of manipulation requires showing that manipulator injected inaccurate information into the marketplace). Edward J. Mawod & Co., 46 S.E.C. 865, 870 n.24 (1977), is not to the contrary. In Mawod, the reports that we found to be part of the manipulative scheme were accurately reporting facts concerning wash sales and matched orders that themselves fabricated an appearance of trading activity. Mawod, 46 S.E.C. at 871-2 (frustrating investors' expectations that supply and demand determine prices paid and received, essence of manipulation is substitution of fiction for fact). While Elgindy failed to disclose in the press release that Key West was a Saf T Lok market maker, he did disclose that information to Bloomberg.
24 NASD barred Elgindy from association with any NASD member in any capacity, expelled Key West from NASD membership, and fined Applicants $50,000 jointly and severally with respect to the manipulative scheme. In light of our dismissal of the manipulation charge, we dismiss the bar, expulsion, and $50,000 fine.
25 NASD Conduct Rule 2110 (2000).
26 Russell A. Simpson, 53 S.E.C. 1042, 1046 (1998) (actions that do not impose final disciplinary sanction not reviewable).
27 See NASD Sanction Guidelines, 88 (2001) (Communications With the Public -- Failing to Comply with Rule Standards Or Use of Misleading Communications), which provides for a fine of between $1,000 and $20,000 for non-egregious cases.
28 Exchange Act Section 19(e), 15 U.S.C. § 78s(e). In September 1998, NASD revoked Elgindy's registration for failure to pay fines and costs associated with a previous NASD disciplinary action. NASD cancelled Key West's registration in November 1998 for failure to pay its NASD fees.
29 We have considered all of the arguments advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.
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