Disciplinary Proceeding - finra

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This Decision has been published by the NASD Office of Hearing Officers and should be cited asOHO Redacted Decision CAF030014.Gastwirth discovered that there was a negative correlation between the C/HP Ratio andthe hypothetical profit. When profit rose, the customers as a group paid less as a fraction ofprofit. 256 Gastwirth concluded that this negative correlation tended to indicate the absence of anagreement or arrangement for the sharing of profits.(c)Rates above Six Cents per Share were not UncommonGastwirth next examined Enforcement’s conclusions about the relative rarity ofcommissions in excess of six cents per share. 257 Gastwirth noted that Campbell, Enforcement’sprimary expert on commission rates, had reported that industry-wide commission rates forinstitutional customers during the relevant period typically ranged between four and ten cents pershare, depending upon the nature of the transaction and services rendered. 258 Accordingly,Gastwirth thought it appropriate to examine how common rates above those levels were at theFirm during the relevant period, particularly for customers of a similar size to those thatcomprise the Ferri-27.Gastwirth first studied commissions paid over two periods, the relevant period under theComplaint and the 12 months preceding the Complaint. For both periods, Gastwirth concludedthat it was not unusual in a statistical sense to have commissions at the Firm outside the range offour cents to ten cents. Slightly more than 40% of the commissions in these periods were eitherbelow four cents or above ten cents per share. 259256 See Tr. 3976:8-25 (Gastwirth); RX 4 at 278 (Gastwirth report); see also RX 4 at 359-63 (Gastwirth report). Theprobability of this occurring randomly “was less than 1 in 10,000.” Tr. 3977:9 (Gastwirth); see also RX 4 at 277(Illustration 17) (Gastwirth report).257 Gastwirth performed this study in the context of a broader review of the integrity of Enforcement’s evidenceregarding the Ferri-27 customers’ “pattern” of paying increased commissions on IPO days. RX 4 at 279-90(Gastwirth report).258 CX 32 at 6 (Campbell report).259 RX 4 at 288 (Gastwirth report).56
This Decision has been published by the NASD Office of Hearing Officers and should be cited asOHO Redacted Decision CAF030014.Gastwirth also examined the frequency of commissions at or above 10 and 20 cents pershare. Again, he found that commissions at those rates were not uncommon during both periods.For example, commissions of 10 cents or more per share happened 39.55% of the time during thereview period, and commissions of 20 cents or more per share happened 28.53% of the timeduring the same period.In addition, in terms of cents per share, Gastwirth found that the commissions had arelatively high degree of “variability,” which he demonstrated using both Gini indices (.574) andcoefficients of dispersion (1.274). 260 He reported similar values for the pre-Complaint period. 261At the hearing, Gastwirth supplemented his findings to address Enforcement’s criticismthat Gastwirth had not excluded trades outside of Enforcement’s inflated rate commissionmatrix. Gastwirth therefore limited his supplemental review to trades of 1,000 shares or moreand added a third commission threshold of seven cents per share. Gastwirth found that trades inall reported categories were significantly more common than Enforcement had argued. At aminimum, nearly 1 out of 5 trades involved a commission rate equal to or greater than 20 centsper share. 262 In addition, Gastwirth noted that the average commission during the 12 monthsimmediately before the review period was 21.6 cents per share and that there were thousands oftrades above 20 cents per share. 263Gastwirth’s findings regarding the relative common occurrence of commission rates inexcess of six cents per share are significant because they undercut Enforcement’s argument that260 See RX 4 at 389 (Ex. 21) (Gastwirth report).261 See RX 4 at 288 (Gastwirth report).262 RX 313 and RX 314.263 RX 4 at 288, 384-86 (Gastwirth report).57
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