## Facts

- Yankee Financial Group, Inc. (Yankee) was a registered broker-dealer that originally operated one office with about a dozen representatives selling mostly bonds and mutual funds.
- Richard F. Kresge owned 95% of Yankee and served as its president and as the firm’s compliance, financial, and operations principal, with overall responsibility for firm operations.
- In 2001, Yankee expanded by acquiring another firm’s Melville, New York office, adding roughly 50 representatives who sold a broader mix of products, including listed equities and penny stocks.
- Rather than developing written supervisory procedures tailored to Yankee’s expanded business, Kresge used the Melville office’s existing supervisory-procedures manual, changing it in a superficial way (including placing “Yankee” over the prior firm’s name).
- Yankee also opened a Brooklyn office staffed by representatives who had left another firm on bad terms; Joseph Ferragamo acted as their spokesperson and played a significant role in the Brooklyn operation.
- Ferragamo resisted registration. Kresge did not determine that Ferragamo was not registered as a general securities representative or principal and did not learn that Ferragamo had been named in two customer arbitrations.
- Kresge did not contact the Brooklyn representatives’ prior employers or uncover that some had worked for disciplined firms and had moved frequently among firms.
- At Ferragamo’s suggestion, Kresge hired Gary Giordano to manage the Brooklyn office, without learning that Giordano had worked at five firms in four years and had only recently passed principal-qualification examinations.
- Kresge did not provide Giordano with a compliance manual and did not designate Brooklyn as an office of supervisory jurisdiction, despite the risks presented by the office’s sales activity.
- Kresge assigned supervisory responsibility over Giordano to Kenneth Gliwa, a Melville manager. Kresge knew Gliwa visited Brooklyn only two or three times, did not regularly review trades or accounts, and was not effective in the role.
- Kresge rarely visited Brooklyn and did not review customer files, confirm that representatives received sales-practice or suitability training, or promptly implement heightened supervision for representatives who generated customer complaints.
- Brooklyn representatives sold speculative over-the-counter securities, failed to explain material risks, made exaggerated or false statements about issuers’ prospects, used high-pressure “boiler-room” sales methods, and made unsuitable recommendations.
- Customers suffered substantial losses, and the firm received customer complaints that were not timely reported to NASD as required.

## Issues

1. Whether Yankee and Kresge were responsible for the Brooklyn representatives’ fraudulent solicitations and unsuitable recommendations in violation of federal securities laws and NASD conduct rules.
2. Whether Yankee and Kresge failed to establish, maintain, and enforce a supervisory system (including written supervisory procedures) reasonably designed to achieve compliance, in violation of NASD supervision and conduct rules.
3. Whether Yankee and Kresge violated NASD reporting rules by failing to report required customer complaints.
4. Whether Yankee and Kresge violated NASD registration and membership obligations by permitting Ferragamo to function as a principal and/or representative without proper registration and by failing to make accurate disclosures concerning his role and financial involvement.

## Decision

- The NAC reviewed an appeal by Yankee and Kresge from an NASD Office of Hearing Officers decision that found sales-practice, supervision, reporting, and registration violations and imposed severe sanctions.
- The NAC affirmed, with limited modifications, findings that firm representatives engaged in fraudulent sales practices and unsuitable recommendations involving speculative securities, in violation of Exchange Act § 10(b) and Rule 10b-5 and NASD Conduct Rules 2110, 2120, and 2310 (and related interpretive material).
- The NAC affirmed findings that Yankee and Kresge failed to supervise and failed to implement a reasonable system of supervision, including inadequate written supervisory procedures, in violation of NASD Conduct Rules 3010 and 2110.
- The NAC affirmed findings that Yankee and Kresge failed to report required customer complaints, in violation of NASD Conduct Rule 3070(c) and Rule 2110.
- The NAC affirmed findings that Yankee and Kresge violated NASD registration and membership requirements by allowing Ferragamo to act in capacities requiring registration and by failing to make required, accurate disclosures concerning his involvement, in violation of NASD Registration Rules 1021(a) and 1031(a), IM-1000-1, IM-1000-3, and Conduct Rule 2110.
- The NAC affirmed severe sanctions in substantial part, including expulsion of the member firm and a bar against Kresge from acting as a principal and in any supervisory capacity, and it modified certain findings and sanction components (including aspects of restitution and related relief) consistent with its modifications.

## Legal Principles

- A member firm must maintain written supervisory procedures and an actual supervisory structure reasonably designed for the firm’s business and risks; copying another firm’s procedures without meaningful implementation can support a supervision violation.
- Assigning supervision to a registered person does not discharge a senior officer’s responsibilities when the officer knows supervision is ineffective or does not provide for trade and account review, training, or on-site oversight appropriate to the office’s activity.
- Fraudulent solicitations and unsuitable recommendations can violate Exchange Act § 10(b) and Rule 10b-5 and also constitute violations of NASD Conduct Rules 2110, 2120, and 2310, including when representatives misstate issuer prospects, minimize risk, or use high-pressure sales tactics.
- NASD rules require timely reporting of specified customer complaints; failing to report such complaints violates Conduct Rule 3070(c) and also violates Rule 2110.
- Individuals who function as principals or representatives must be properly registered, and firms must ensure accurate membership-related disclosures; permitting unregistered principal/representative activity and filing inaccurate or incomplete disclosures violates NASD registration and conduct rules.
- Sanctions may include expulsion, bars, and restitution when misconduct involves widespread sales-practice abuses, serious supervisory breakdowns, and significant customer harm.

## Conclusion

In its 2006 decision, the NASD National Adjudicatory Council largely affirmed findings that Yankee’s Brooklyn office engaged in fraudulent and unsuitable sales of speculative securities and that Yankee and its president-owner, Richard Kresge, failed to maintain adequate written procedures and effective supervision, failed to report customer complaints, and allowed unregistered principal/representative activity tied to Joseph Ferragamo; the NAC upheld severe sanctions in substantial part while making limited modifications to certain findings and sanction components.


Department of Market Regulation v. Yankee Financial Group, Inc., No. CMS030182, 2006 NASD Discip. LEXIS 21 (2006)