Broker-Dealer Litigation - Greenberg Traurig LLP

infirmities warranting reversal. The Commission denied the motion for reconsideration on the
grounds that Cody failed to show any manifest errors of law or fact or present newly discovered
evidence.
b. Unfair/Fraudulent Markups or Commissions
In re Am. Funds Distrib., Inc., Release No. 64747, 2011 SEC LEXIS 2191 (June 24, 2011).
Q.2.b
The Commission overturned a NASD hearing panel’s censure and imposition of a
$5 million fine on a NASD member firm that was the principal underwriter and distributor for a
family of mutual funds. The NASD imposed the sanctions based on the firm’s participation in
mutual fund directed brokerage practices from 2001-2003, in violation of NASD Rule 2830(k),
the “Anti-Reciprocal Rule.” The National Adjudicatory Council had affirmed the hearing
panel’s decision and the sanctions it imposed, finding that the member firm violated the Rule
because its target commissions, while considered non-binding arrangements with retail firms,
constituted a specific amount or percentage of brokerage for the sale of mutual fund shares, in
violation of the Rule. The Commission concluded that the Rule in effect at the time of the
directed brokerage arrangement was sufficiently ambiguous to preclude the member firm from
having fair notice that its practices were prohibited. The Commission noted, however, that the
2004 Amendments to the Rule “addressed the uncertainty . . . and, as a result of these changes,
the directed brokerage practices at issue are now clearly prohibited.”
c. Other Fraudulent Practices
(i)
Misrepresentation
Q.2.c(i)
In re Spartis, Release No. 64489, 2011 SEC LEXIS 1693 (May 13, 2011).
The Commission sustained the NYSE’s imposition of sanctions against Spartis and Elias
(together “Applicants”), former registered representatives associated with a NYSE member firm
(the “Firm”). A NYSE hearing panel had found that Spartis and Elias had caused the Firm to
violate NYSE Rule 472.30 by sending customers communications between 1998 and 2001 that
failed to depict any downside risk of holding WorldCom, Inc. shares on margin. The hearing
panel censured Spartis and Elias and suspended Spartis for five months and Elias for three
months. Applicants appealed to the NYSE Board of Directors, which vacated the suspensions
but otherwise affirmed the hearing panel’s ruling. In their appeal to the Commission, the
Applicants argued in relevant part that they should not be found liable because they had not acted
with scienter. The Commission rejected this argument on the basis that Rule 472.30 does not
require a showing of scienter. The Commission sustained the NYSE’s censures.
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