## Facts

- A registered broker-dealer operated a Boston branch managed by John T. Batal; Michael R. Lindburg served as general counsel and (former) chief compliance officer with firm-wide compliance responsibility and disciplinary authority.
- A Boston registered representative serviced customers with highly concentrated positions in a bank stock financed by substantial margin debt and was restricted from soliciting additional purchases of that stock for those customers.
- The representative executed cross trades, including wash sales, and falsely marked order tickets as “unsolicited.”
- The representative engaged in cancel-and-rebill activity, shifting trades among customer accounts to address complaints or margin issues without proper authorization, and made unauthorized inter-account transfers and misappropriated customer funds.
- Firm reporting and controls did not effectively identify cross trades or wash sales, and order tickets in the branch did not reliably indicate whether transactions were solicited or unsolicited.
- Branch-level approvals for order-ticket changes occurred without meaningful firm-wide procedures requiring review, documentation, or verification of the reasons for changes.
- Red flags arose from a self-regulatory inquiry into the representative’s activity, an internal audit identifying ticketing deficiencies, and unusual cancel-and-rebill patterns; Lindburg and Batal did not implement adequate follow-up, investigation, or corrective measures.

## Issues

1. Whether the broker-dealer and supervisory personnel failed reasonably to supervise the representative with a view to preventing violations of Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
2. Whether the broker-dealer willfully violated Exchange Act § 7(c) and Regulation T (margin requirements) and Exchange Act Rule 10b-6 (then-applicable trading restrictions).

## Decision

- The SEC instituted and settled a public administrative proceeding by accepting offers of settlement on a neither-admit-nor-deny basis and issued an order with findings and sanctions.
- The SEC found the firm, Batal, and Lindburg failed reasonably to supervise the representative with a view to preventing violations of Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5.
- The SEC found the firm willfully violated Exchange Act § 7(c) and Regulation T and willfully violated Exchange Act Rule 10b-6.
- The SEC censured the firm and required it to retain an independent consultant to review and recommend improvements to specified compliance policies, practices, and procedures.
- The SEC censured Batal, suspended him for 30 days from association with any broker-dealer, and barred him from acting in a supervisory capacity with any broker-dealer for three years.
- The SEC censured Lindburg and barred him from acting in a supervisory capacity with any broker-dealer for one year.

## Legal Principles

- A broker-dealer must maintain and enforce a supervisory system reasonably designed to prevent and detect securities law violations by associated persons.
- Individuals with supervisory authority, including compliance and legal officers who possess responsibility and power to require corrective action or impose discipline, may be liable for failure reasonably to supervise.
- When supervisors receive significant warning signs (including regulatory inquiries, audit findings, or suspicious trading and recordkeeping patterns), reasonable supervision requires inquiry, verification, escalation as appropriate, and documented corrective action; reliance on unverified explanations may be unreasonable.
- Deficient procedures and surveillance tools (e.g., inadequate reporting that fails to surface cross trades or wash sales, and weak controls over solicitation designations and ticket changes) can support a finding of unreasonable supervision.
- Firms may be sanctioned for willful violations of margin requirements under Exchange Act § 7(c) and Regulation T and for willful violations of trading restrictions under Exchange Act Rule 10b-6 based on the firm’s conduct and control failures.

## Conclusion

The SEC imposed sanctions after finding that the broker-dealer and two supervisors failed reasonably to supervise a representative amid repeated red flags and inadequate controls, and that the firm also willfully violated federal margin and trading rules; remedial relief included a compliance consultant, censures, a suspension, and supervisory bars.


In re First Albany Corp., Exchange Act Release No. 34-30515 (Apr. 1, 1992)