was acting as principal in the transactions. However, we have held that the mere sending of "principal" confirmations is not determinative of the actual relationship between the firm and the customer, and does not constitute effective disclosure of the firm's interest where, as here, the customer did not appreciate the significance of the term "principal" appearing on the confirmation.19

The transactions under review were handled by registrant principally through Johnson, its vice president and director, but they were also known to Mason, registrant's president who admittedly dominated and controlled it. Johnson took the initiative in handling registrant's transactions with this customer and was the chief beneficiary of the excessive profits so obtained.20 He more than anyone else dealt directly with this customer and failed to make the disclosures which we have found to be required. The evidence clearly indicates that he was experienced in the securities business and was entirely familiar with the customer's inexperience and the handling of the account.

Mason took an active part in registrant's operations, and received copies of all confirmations and of at least some of the recommendations made to this customer. He prepared office memoranda which emphasized Johnson's sales as a spur to the efforts of other salesmen. He knew pricing arrangements with this customer were unique, and that the customer very definitely relied on registrant. In view of these facts and Mason's experience in the securities business, we cannot accept his claim that he did not know that investment trust shares were sold to this customer in amounts slightly below the break-points, and that he was misled by Johnson and Hauch as to the profits taken in transactions with this customer. Indicative of his attitude is his statement to Hauch, when the latter told Mason his concern about the activity developed by Johnson in this customer's account and Johnson's reliance thereon for the bulk of his earnings: "Who do you think is going to pay for the electric light bills, who do you think is going to pay my salary and yours in the meantime if [the activity in the account is reduced, as suggested by Hauch]?"

Hauch also participated in the fraudulent dealings with this customer. He rendered extensive investment advisory services to the customer, and although he questioned the degree of activity in the account, he collaborated with Johnson in determining the nature and amount of securities purchases and sales to be recommended to the customer and the price at which the securities other than investment shares should be sold to the customer.

10 Allender Company, Inc., supra, William J. Stelmack Corp., supra, E. H. Rollins & Sons, Inc., 18 S. E. C. 348 (1945), Norris & Hirshberg, Inc., 21 S. E. C. 865, 888-9 (1946), affirmed 177 F. 2d 228 (C. A. D. C. 1949).

20 Johnson received 50% of registrant's gross income from transactions with this account.

On the basis of the foregoing, we find that registrant, Johnson, Mason and Hauch each willfully violated Section 17 (a) of the Securities Act of 1933 and Section 10 (b) of the Securities Exchange Act of 1934 and Rule X-10B-5 thereunder, and that registrant, aided and abetted by the other respondents, willfully violated Section 15 (c) (1) of the Exchange Act and Rule X-15C1-2 thereunder.21

PUBLIC INTEREST

The fraudulent conduct which we have found was of a nature to require the imposition of remedial sanctions in the public interest. Registrant however claims that it should be subject to no sanction by us because of sanctions heretofore imposed by the NASD and because of the change in its management.

In an earlier proceeding before the NASD against these respondents, based in part upon the transactions here under consideration, registrant was fined $5,000,22 Mason was suspended from NASD membership for six months, and Johnson and Hauch were suspended for three months and fined $1,000 and $100 respectively.23 In addition, registrant had no trading privileges on the Midwest Stock Exchange for about 34 days, pending its requested transfer of the exchange membership from Mason, who withdrew from registrant, after the NASD decision. Registrant was also disqualified from doing business in Wisconsin for about five months and experienced some delay in renewing its licenses in Illinois and Michigan as a result of these transactions. After the filing of a complaint against registrant by the Wisconsin Securities Department, registrant turned over to the customer $8,790.82, the estimated amount of the benefit this customer would have obtained if purchases of investment trust shares had been made at the rates effective at the break-point.

As applicable to the instant case, the composite effect of the cited provisions is to make unlawful the use of the malls or instrumentalities of interstate commerce in order to effect a sale of any security where, inter alia, a device to defraud is employed, an untrue statement or a misleading omission with respect to a material fact is made, or any act, practice, or course of business is engaged in which operates or would operate as a fraud and deceit.

Registrant has excepted to the admission of certain evidence. In part such evidence consists of intraoffice memoranda, lists and letters of securities recommendations, original order tickets, and written statements offered by Hauch substantially duplicating his testimony in the record. The remainder consists of prior testimony taken in connection with our investigation of this matter prior to the formal hearing, and incorporated into the record subject to the exceptions by the respondents. In our opinion, the evidence in question is relevant and admissible, although some of it merits only little weight, to show respondents' course of conduct and their knowledge of the nature of registrant's relationship with this customer and of the transactions under review.

Mason paid a substantial part of registrant's fine.

Registrant states that subsequent to the NASD decision, it established various internal controls relating to the scrutiny and supervision of its business transactions, including requirements for prompt review of all confirmations by two of its officers and for advance formal approval by a senior officer of all "principal" transactions.

After the NASD decision, Johnson and Mason resigned from registrant, and Mason sold his controlling stock interest to registrant's present three directors."4 Registrant claims that the imposition of additional sanctions by the Commission would be unfair to registrant's present management which it is asserted took no part in the violations and has since acted in complete good faith. However, each of registrant's present three directors, who are also its senior officers and control its outstanding stock, was an officer, director, and stockholder of registrant at the time of the transactions under consideration and either knew or was in a position to know of the fraudulent transactions, which constituted the largest single source of registrant's income. We are not persuaded that the prior sanctions and other circumstances pointed to by respondents afford a basis for relieving registrant from remedial sanctions necessary in the public interest and for the protection of investors.25 The violations in this case do not involve merely an error of judgment as to the appropriate markup to be charged in connection with particular transactions. They represent in most part rather a deliberate scheme for defrauding a particularly unsophisticated customer by patterning riskless transactions so as to deprive the customer of established and clearly available price benefits, in order to swell registrant's profits. The culpability attaching to this conduct is heightened by the fact that the victim was an order of nuns engaged in charitable activities which, as registrant knew, acted without any independent advice and reposed complete trust and confidence in this firm. Registrant's present controlling stockholders are in no sense innocent purchasers entitled to be viewed as separated from the responsibility for the fraud. They were stockholders, directors, and officers actively participating in registrant's business at the time the fraudulent conduct was producing a large part of the firm's income, and they knew when they acquired Mason's stock interest that the firm's right to continue in business as a registered broker-dealer would be the subject of examination by this Commission because of the fraud. Under all the circumstances, we conclude that the public interest requires revocation of registrant's registration as a broker and dealer and its suspension from membership in the Midwest Stock Exchange

24 Mason and his wife owned 5,500 of the 9,400 shares issued and outstanding capital stock of registrant, and each of registrant's present three directors acquired 1,866 shares of Mason's holdings at the time of the transfer.

Registrant contends that the prior NASD disciplinary proceedings, which concerned the transactions here involved, operate as a merger of all claims, charges and causes of action asserted and as a bar to the present proceedings. We do not agree. Our power to revoke the registration of brokers or dealers or to suspend or expel them from membership in a registered securities association or a national stock exchange is entirely independent of the disciplinary powers of the NASD. This Commission is not authorized by statute to initiate actions by the NASD against a member thereof or to increase the sanctions imposed by that body, and the discharge of our statutory duties cannot be precluded by prior action or inaction by the NASD.

so long as it is not registered as a broker and dealer,26 and that Mason, Johnson, and Hauch are each a cause of such disciplinary action. Furthermore, we shall not permit reregistration for a period of at least six months from the date hereof. If and when a new application for registration is filed it should be accompanied by a statement as to the methods planned to be used in selling securities to customers.27 An appropriate order will issue.

By the Commission (Chairman Cook and Commissioners McEntire and Adams), Commissioner Rowen filing a concurring statement (attached).

Commissioner Rowen concurring:

I concur in the action of the Commission revoking registrant's registration and suspending it from membership in the Midwest Stock Exchange and the NASD. However, I cannot join in the conclusion that reregistration should not be permitted for a period of at least 6 months. The present ownership of registrant is in persons other than those who have been found to have participated actively in the fraudulent conduct involved here. This, coupled with the facts that sanctions have heretofore been imposed on registrant for what appear to be these same transactions and that internal controls designed to prevent fraudulent conduct in the future have been established by it, would lead me to permit registrant to reenter the securities business in a period considerably shorter than 6 months if it can show that such action would be appropriate in the public interest.

Nor can I join in that portion of the opinion referring to the future effect which may be given to the Commission's finding that Johnson willfully violated certain provisions of the Acts and rules thereunder. No application or proceeding regarding Johnson's registration as, or employment by, a broker-dealer is presently before the Commission. Accordingly, I do not feel it is necessary or appropriate at this time to pass upon the evidentiary weight to be given such finding in a proceeding which may never occur.

Revocation of registration as a broker and dealer automatically terminates NASD membership.

Since our discussion of the facts and issues and our detailed findings herein deal with all pertinent factual and legal issues raised by the exceptions to the hearing officer's recommended decision, it is unnecessary to rule separately on each such exception. To the extent that the exceptions filed are in accord with the views herein expressed, they are sustained, and to the extent that they are inconsistent therewith they are overruled.