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Under all of the circumstances, and giving due weight to the findings and recommendation of the NASD, we find it appropriate in the public interest to grant the instant application and approve the admission of J. A. Sisto & Co. to NASD membership.
An appropriate order will issue.
By the Commission (Chairman Hanrahan and Commissioners McConnaughey, McEntire, McDonald, and Rowen).
WALTER S. GRUBBS doing business as WALTER S. GRUBBS
Promulgated July 30, 1948.
(Securities Exchange Act of 1931--Sections 15 (b) and 15A)
Grounds for Revocation: Withdrawal Notice: Public Interest Where registrant willfully violated the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 by taking secret profits in transactions with a customer and inducing excessive trading in such customer's account, and willfully violated Commission rules by failing to disclose certain required information in reports of his financial condition and to keep required books and records; but where, prior to the institution of revocation proceedings, registrant ceased to do business and filed a notice of withdrawal of registration, held, under all the circumstances (including the character of the violations and the fact that they apparently affected only one customer, and giving due weight to the hearing examiner's recommendation that no adverse action be taken against registrant), that order permitting the notice of withdrawal to become effective would be consistent with the public interest and the protection of investors.
Reports Under Rule X-17A-5--Disclosure of Liability for Borrowed Securities Reports under Rule X-17A-5 which failed to show liability for return of securities borrowed by registrant, even though the lenders had in fact agreed to subordinate their claims to claims of public creditors, held, misleading and not in compliance with the express requirements of the Rule.
Thomas B. Hart, Alexander J. Brown, Jr. and Robert J. Sugrue, of the Chicago Regional Office of the Commission, for the Division of Trading and Exchanges.
Walter S. Grubbs, pro se.
FINDINGS AND OPINION
This is a proceeding under Sections 15 (b) and 15A (1) (2) of the Securities Exchange Act of 1934 to determine whether Walter S. Grubbs, doing business as Walter S. Grubbs & Company, a registered broker and dealer, willfully violated Sections 10 (b), 15 (c) (1), and 17 (a) of that Act and rules thereunder, and Section 17 (a) of the Securities Act of 1933; and, if so, whether it is necessary or appropriate in the public interest for the protection of investors to revoke his registration or to suspend or expel him from membership
1 1 Section 15 (b) of the Securities Exchange Act of 1934 provides in part:
"The Commission shall, after appropriate notice and opportunity for hearing, by order . . . revoke the registration of any broker or dealer if it finds that such ... revocation is in the public interest and that (1) such broker or dealer . . . (D) has willfully violated any provision of the Securities Act of 1933, as amended, or of this title, or of any rule or regulation thereunder ..."
28 S, E, C.--34----4138
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in the National Association of Securities Dealers, Inc.? Since registrant has filed a notice of withdrawal of registration, the further question is raised whether it would be consistent with the public interest and the protection of investors to permit such notice of withdrawal to become effective.
After appropriate notice, a hearing was held before a hearing examiner. Grubbs appeared without counsel.: He participated in the hearing and introduced evidence in his own behalf. At the close of the hearing he stated that he waived the opportunity to file proposed findings or briefs, and that he desired to rest upon the record made before the hearing examiner. Counsel for the Division of Trading and Exchanges submitted requests for findings. The hearing examiner filed an advisory report in which he found that certain of the allegations of the order for proceedings were sustained by the evidence; however, in view of extenuating circumstances referred to in his report, he recommended that "no action of an adverse nature be imposed." Counsel for the Division of Trading and Exchanges filed exceptions to the hearing examiner's report. Our findings are based upon an independent review of the record.
Grubbs has been engaged in the securities business in St. Paul for over twenty-five years. In September 1938, he established himself
sole proprietorship trading as "Walter S. Grubbs & Company," and in January 1939, his registration as a broker and dealer became effective. On July 1, 1947, he ceased to do business for himself, and on July 11, 1947, he filed a notice of withdrawal of his registration. However, since the order for the instant proceeding was issued on July 30, 1947, the withdrawal notice has not become effective. 4
The order instituting this proceeding alleges that registrant willfully violated the anti-fraud provisions of the Acts in connection with his handling of the account of his principal
2 Section 15A (1) of the Securities Exchange Act of 1934 provides in part:
"The Commission is authorized, if such action appears to it to be necessary or appropriate in the public interest or for the protection of investors ...(2) after appropriate notice and opportunity for hearing, by order to suspend for a period not exceeding 12 months or to expel from a registered securities association any member thereof who the Commission finds (A) has violated any provision of this title or any rule or regulation thereunder ... or (B) has willfully violated any provision of the Securities
Act of 1933, as amended. 3 The hearing examiner advised Grubbs of his right be represented counsel, to cross-examine witnesses, to object to the introduction of evidence, to present evidence in his own behalf, and to file proposed findings and briefs.
4Rule X-15B-6, promulgated pursuant to Section 15 (b) of the Securities Exchange Act of 1934, provides in part:
"If a notice to withdraw from registration is filed by a broker or dealer pursuant to Section 15 (b), it shall become effective on the thirtieth day after the filing thereof with the Commission, unless prior to its effective date the Commission institutes a proceeding pursuant to section 15 (b) to revoke or suspend the registration of such broker or dealer or to impose terms and conditions upon such withdrawal..."
customer, Miss C, during the period January 1, 1944 to
, March 25, 1947; that during this period, he obtained the trust and confidence of such customer and induced her to believe that he acting for her and in her best interests, but that, instead, he acted adversely toward her in transactions of purchases and sales for her account and thereby obtained secret profits; and that for his own gain and benefit he induced her to engage in transactions in securities which were excessive in size and frequency in view of the character of the account. The order also alleges that Grubbs filed with the Commission reports of his financial condition which falsely stated that he owned certain securities, and that he failed to keep proper books and records as required by the rules of the Commission,
THE ACCOUNT OF MISS C
Miss C has known Grubbs since about 1917 and has had dealings in securities with him since about 1922. She is a person of considerable means and all of her dealings with Grubbs have been on a cash basis. She testified that she is not a "speculator," that it was understood that her account was primarily an investment account, and that she was dependent on the income from her investments "to live on." She further stated that she had had no experience in the business world; that she had great trust and confidence in Grubbs, put her affairs in his hands, and relied on his judgment almost completely; and that he kept in frequent touch with her and made numerous trading suggestions which she followed in almost every case.
While she took a keen interest in her investments and read financial periodicals, the evidence discloses that she was not familiar with the techniques of the market, and, in particular, with the manner in which Grubbs profited from her account. Thus, while she did not understand the technical difference between a "broker" and a "dealer," she testified that she always understood and believed that Grubbs was acting as her financial adviser and that he was acting for her and in her best interests at a "commission."
On January 1, 1944, the beginning of the period under review, Miss C's portfolio consisted of securities costing her $333,045, all of which she had purchased through Grubbs.5 By the end of the period, March 25, 1947, about 85% of these securities had been sold, some at a profit and some at a loss to her, and her net loss on these sales was $197. However, in the interim, Grubbs not only reinvested the proceeds of the sale for her, but caused her to augment her total cash investment by about $ 14,000, with the result that at the end of the period her portfolio contained securities costing her $347,147. Moreover, in the course of buying and selling, much of her investment was turned over again and again in 103 purcha ses totalling $869,596 and 108 sales totalling $855,494. In these transactions, which involved both listed and unlisted securities, she made profits from specific sales totalling about $25,000 and suffered losses from other sales totalling about $60,000. Her net realized losses therefore amounted to about $35,000. In addition, based on market values at the close of the period, she had unrealized losses in her remaining portfolio of about $60,000. Thus, her aggregate loss amounted to about $95,000, or over 27% of the cost of the securities held in her account at the close of the period.
5 About 45,000 of these securities had been purchased through Grubbs prior to 1938 when he was associated with other firms. The balance was purchased through registrant for approximately $288,000 (of which about $17,400 represented profit to Grubbs).
On the other hand, Grubbs' profits from the transactions in Miss C's account during the period totalled about $55,800. Such profits were largely derived from purchase transactions for Miss C's account in which, in 95 out of 103 instances, Grubbs purported to sell his own securities to Miss C, Grubbs admits that he maintained no pre-existing inventory, but would complete each sale to the account by making a contemporaneous purchase in the open market. His profits (i.e. mark-ups over his own costs) ranged from about 1% to about 12% in individual cases, averaging 5.74%. In the case of 49 of the 108 sales transactions for the account, Grubbs purported to purchase securities from Miss C for his own account. In such cases he resold the securities contemporaneously in the open market, and his profits ranged from less than 1% to over 11% in individual cases, averaging 2.69%. The remaining sales by Miss C were confirmed by Grubbs as agent, and in these sales he charged no commissions.
All of the transactions of purchases and sales fall into 76 off-setting groups, or pair-offs, executed at or about the same time--in other words, "switches," in which one or more of Miss C's securities would be sold by Grubbs as agent or purchased by him from the account as principal, and, in their place, others would be sold to the account for approximately the same aggregate amounts. Considering each switch as an integral transaction, Grubbs' over-all profit from buying and selling, when related only to his cost of securities sold to the account, ranged from less than 1% to more than 16% in individual cases, averaging 6.91%. Nine of these switching operations involved profits to Grubbs of well over 10%, and 57 of them involved profits ranging between 5 and 10%.'
6 In the few instances in which he confirmed purchases for Miss C as agent he made no specific charge. However, these purchases were accompanied by contemporaneous sales by the account (to himself) of other securities in which he profited on the resales.
7 The following transaction is fairly illustrative of the manner in which the switching operations took place and how Grubbs profited. On September 6, 1944, Grubbs, purporting to act as principal, purchased 700 shares of Hickok Oil "A" from Miss C's account for $8,837.50; and on September 9, 1944, he purported to sell to the account 85 Minn, P.L. 6%Pfd. for $8,840. He resold the Hickok Oil stock for $9,362.15 at a profit to himself of $524.65, and purchased the Minn. P.L. stock for $8.368.75 in order to make delivery to