## Facts

- George J. Kolar was the Detroit metropolitan area manager for Dean Witter Reynolds, Inc. (Dean Witter), a registered broker-dealer, and managed Dean Witter’s Southfield, Michigan branch office.
- All Detroit-area branch managers reported to Kolar, including the Troy, Michigan branch manager, Raymond Basile; Kolar had input into hiring, discipline, and termination decisions affecting Troy-branch personnel.
- Kolar visited the Troy branch about every six to eight weeks, spoke with registered representatives, reviewed branch ledgers, and had frequent telephone contact with Basile.
- Dean C. Turner was a registered representative in the Troy office. When hired, Turner told Basile that he invested in promissory notes issued by Lease Equities Fund, Inc. (LEF).
- Turner was instructed not to sell LEF promissory notes to Dean Witter customers because the product was not approved for sale by the firm.
- Despite the prohibition, Turner sold LEF promissory notes to Dean Witter customers; the SEC alleged the notes were unregistered and that Turner’s conduct involved registration and antifraud violations.
- In August 1992, a representative of another financial firm (CIGNA Financial Advisors, Inc.) advised Kolar that Turner was “selling away” LEF investments, that LEF had cash-flow problems, and that Turner was likely controlling payments to investors.
- Kolar and Basile met with Turner. Turner denied selling the notes as a broker and asserted he was only an investor; he provided what he represented to be his 1991 tax return showing investment income rather than sales compensation.
- After the interview and review of the tax return, Kolar, Basile, and Dean Witter’s Midwest regional director decided not to take further action or conduct additional investigation.
- From approximately September 1992 through June 1995, Turner continued offering and selling LEF promissory notes outside Dean Witter’s approval.
- LEF ultimately failed to meet payment obligations and was liquidated, causing investor losses.
- The SEC instituted an administrative proceeding alleging that Kolar failed reasonably to supervise Turner with a view to preventing violations of the federal securities laws.

## Issues

1. Whether Kolar had supervisory authority over Turner for purposes of Exchange Act § 15(b)(4)(E).
2. Whether Kolar failed reasonably to supervise Turner, with a view to preventing violations, after receiving the August 1992 information suggesting selling away and issuer distress.
3. Whether it was in the public interest to impose a supervisory suspension and a civil money penalty under the Exchange Act.

## Decision

- The ALJ found that Kolar had supervisory responsibility over the Troy branch’s manager and registered representatives, including Turner, within the meaning of Exchange Act § 15(b)(4)(E).
- The ALJ determined that Turner engaged in misconduct involving sales of LEF promissory notes and that Turner’s conduct included willful violations of registration and antifraud provisions charged by the SEC.
- The ALJ held that Kolar failed reasonably to supervise Turner because, after receiving specific warnings in August 1992, Kolar relied primarily on Turner’s denials and a facial review of an unverified tax document and did not take follow-up steps reasonably calculated to determine whether Turner was selling LEF notes for compensation.
- The ALJ concluded that Kolar did not take sufficient supervisory steps, such as independent verification, additional inquiry, or monitoring designed to detect and stop continued off-book sales.
- The ALJ suspended Kolar for six months from association with any broker or dealer in a supervisory capacity.
- The ALJ imposed a $20,000 civil money penalty under Exchange Act § 21B.

## Legal Principles

- Under Exchange Act § 15(b)(4)(E), a supervisor may be sanctioned for failing reasonably to supervise a person subject to the supervisor’s authority, with a view to preventing violations of the federal securities laws.
- Supervisory status turns on authority and responsibility in practice, including oversight of branch operations and registered representatives, not merely job titles.
- Reasonable supervision requires a response reasonably designed to prevent and detect misconduct when specific warning signs arise; procedures alone are not enough if they are not applied in the face of concrete allegations.
- Where credible information suggests selling away, unapproved products, or possible investor harm, a supervisor must take steps beyond accepting the registered representative’s explanation, including verification and follow-up inquiry appropriate to the risk.
- In determining sanctions, the SEC applies a public-interest standard; remedial measures may include a suspension from supervisory association and a civil penalty to deter supervisory failures and protect investors.

## Conclusion

In this SEC administrative proceeding, the ALJ found that George J. Kolar, as Dean Witter’s Detroit-area manager, had supervisory authority over the Troy branch and failed reasonably to supervise registered representative Dean C. Turner after receiving specific August 1992 warnings of selling away and issuer problems; because Kolar’s limited inquiry did not include adequate verification or follow-up and Turner continued selling unapproved, unregistered LEF promissory notes to customers, the ALJ imposed a six-month supervisory suspension and a $20,000 civil money penalty in the public interest.


In the Matter of George J. Kolar, Initial Decision Rel. No. 152, Administrative Proceeding File No. 3-9570 (1999)