Broker-Dealer Litigation - Greenberg Traurig LLP

In assessing the appropriate sanctions, the ALJ found that Clifton’s conduct was
egregious, having placed himself in a supervisory position, and acted with scienter in both
making affirmative misrepresentations and omissions himself, and failing to adequately
supervise the sales representatives to ensure that the information they provided to customers was
accurate, complete, and truthful. He failed to acknowledge his wrongdoing. The ALJ noted that
because Clifton remained the owner and president of a registered broker-dealer, he had
opportunities to violate securities laws in the future.
As a result, the ALJ imposed a cease-and-desist order, collateral bar, and a third-tier civil
penalty of $130,000, as requested by the Division of Enforcement. As to the collateral bar, the
ALJ’s decision contained a discussion of the appropriateness of a full collateral bar from all
capacities provided under the Dodd-Frank Act. The ALJ considered the retroactive effect of
Dodd-Frank as a remedy for conduct that pre-dated its enactment., questioning whether Clifton
had a reasonable expectation that his misconduct would not affect his ability to associate with
industry segments other than brokers or dealers. He concluded that because recent amendments
to Section 15(b) of the Exchange Act also includes two new associational bars – municipal
advisors and NRSROs – which did not exist at the time of Clifton’s conduct, they were
impermissibly retroactive because they attached new legal consequences. As such, the ALJ
imposed only associational bars with respect to brokers, dealers, investment advisers, municipal
securities dealers, and transfer agents.
Matter of Gallardo, Admin. Proc. File No. 3-14139, SEC Release No. 34-65658, 2011 SEC
LEXIS 3848 (Oct. 31, 2011).
The SEC charged Zurita, the President of a broker-dealer and supervisory responsible for
the firm’s New York branch office, with failing reasonably to supervise a registered
representative who was engaged in a fraudulent profit-sharing arrangement with customers. The
SEC alleged that Zurita failed to follow-up on red flags by which he became aware that a
customer was communicating with the representative about the arrangement, which violated the
firm’s procedures, and also about stock market investments with exorbitant returns, yet he failed
to take sufficient steps to investigate the representative’s conduct. While made some initial
inquiries, he did not conduct sufficient follow-up to determine if disciplinary steps or other
actions were necessary. In other instances, after becoming aware of customer complaints, Zurita
did not visit the New York office to investigate. In addition, the SEC took the position that
Zurita, as President of the firm, was responsible for establishing, maintaining, and implementing
policies, procedures, and systems reasonably designed to detect violative activity by the firm’s
registered representatives. Thus, while the firm had procedures that discussed prohibited
transactions, the firm and Zurita failed to develop reasonable systems to implement the
procedures with respect to such transactions.
The SEC’s order noted that the firm and Zurita permitted an unlicensed foreign associate
to perform the functions of a registered representative at the firm’s New York branch office, and
that Zurita was physically located in Florida, even though he was responsible for the New York
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