N E W Y O R K S T O C K E X C H A N G E, I N C.

EXCHANGE HEARING PANEL DECISION 03-200 October 30, 2003 DONALD LARRY SMITH FORMER REGISTERED REPRESENTATIVE

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Effected stock transaction shortly before issuance of research report which he had prepared concerning such stock; caused a violation of Exchange Rule 472.40(2)(iii) by failing to disclose that he held securities in stocks recommended in research report he authored; opened accounts at a member firm that concealed fact of his employment at another member firm; violated Exchange Rule 407(b) by maintaining securities accounts at another firm without consent of his employer Censure and two and one-half year bar.

Appearances: For the Division of Enforcement For the Respondents James D. ODonnell, Esq. Joel E. Davidson, Esq. Steven M. Tanner, Esq. David L. Becker, Esq. Elena Salzman Kindler, Esq. Neil T. ODonnell, Esq.

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An Exchange Hearing Panel conducted a hearing on charges brought by the Exchanges Division of Enforcement against Donald Larry Smith, a former registered representative with Sutro & Co., Incorporated (Sutro or the Firm). Mr. Smith was charged with having:

I. Engaged in conduct inconsistent with just and equitable principles of trade in that, on one or more occasions, he effected stock transactions in accounts in which he and/or his spouse had an interest shortly before his member firm employer was to issue research reports which he had prepared and authored concerning such stocks.

II. Caused a violation of Exchange Rule 472.40(2)(iii) in that, on one or more occasions,

he authored a research report for distribution to the public by his member firm employer which recommended the purchase of a specific security but failed to disclose that he held securities of the recommended issuer.

III. Engaged in conduct inconsistent with just and equitable principles of trade in that, on

one or more occasions, he made or caused misrepresentations on new account forms in opening accounts at a member firm that concealed the fact of his employment at another member firm.

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IV. Violated Exchange Rule 407(b) in that he maintained one or more securities accounts

for himself and/or his spouse at another member firm without the prior written consent of his member firm employer, and he failed to arrange for duplicate confirmations and monthly statements for such accounts to be sent to his employer for review.

Mr. Smith submitted an Answer, through his attorneys, which substantially acknowledged that he had engaged in misconduct. The Answer did claim, however, that one of the transactions at issue did not actually occur until after the issuance of his research report on the stock. Further, Mr. Smith claimed that the proscription of Exchange Rule 472, requiring disclosure of positions held by employees involved in preparation or issuance of a research report, was not clear at the time of the events at issue. But Mr. Smiths Answer primarily sought mitigation of any penalty imposed by the Exchange. In this regard, Mr. Smith contended that he was under stress in his personal life during the period when these events occurred; that the transactions at issue were de minimus in profits and in impact on the market; and that he had suffered sufficient discipline by his employer, including a fine far exceeding the aggregate of any profits he made in the transactions at issue. He pointed out that his record of thirty years in the securities industry was spotless prior to these events. Mr. Smith appeared at the hearing with counsel, and testified. On the basis of the evidence and testimony presented at the hearing, as well as Mr. Smiths admissions, the Hearing Panel found as follows:

Background and Jurisdiction

1. Donald Larry Smith (Smith) was born in . Smith entered the securities industry as a research analyst in approximately 1969, and worked as a research analyst for several securities firms before joining a member organization as a research analyst in May 1975; in that firm he served as director of research from 1981 until July 1989. He was approved by the Exchange as a supervisory analyst in September 1978 and as a registered representative in April 1985.

2. Smith was employed as a research analyst with several other member organizations in

the period July 1989 to May 1997.

3. In or about May 1997, Smith became employed as a research analyst with Tucker Anthony Incorporated (Tucker Anthony). In the spring of 1998, Smith was transferred to Sutro & Co. Incorporated (Sutro), which at that time had the same corporate parent, Freedom Securities, as Tucker Anthony. At Sutro, Smith also served as a research analyst.

4. On March 3, 2000, Enforcement received from Sutro a Form RE-3 reporting that

Smith had been fined $30,000 and would be suspended for thirty days after an internal investigation revealed that Smith made purchases of securities in undisclosed accounts maintained away from Sutro prior to or contemporaneously with the

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issuance of research notes authored by Smith which upgraded Sutros research opinion on the securities involved (the Form RE-3). The Form RE-3 also stated that in establishing securities accounts away from Sutro, Smith failed to inform or obtain the consent of Sutro and failed to disclose his affiliation with such member organization.

5. By letter, dated March 3, 2000, Enforcement notified Smith that it was investigating

the matter reported on the Form RE-3.

6. In or about January 2001, Smith was transferred from Sutro back to Tucker Anthony as part of a reorganization of the firms, which were then owned by Tucker Anthony Sutro Corp. (Tucker Anthony Sutro). Smith continued to work as a research analyst for Tucker Anthony until October 2001 when his employment ended as a result of a corporate acquisition.

7. From November 2001 to June 2003, Smith was employed as a research analyst with

another member organization. He is no longer employed in the securities industry.

Misrepresentations in Opening Accounts at an Outside Firm

8. While he was employed with Sutro, Smith opened four securities accounts at another member organization (collectively, the outside firm accounts) without the approval of Sutro.

9. In early 1999, Smith applied for and received approval to maintain a securities

account outside Sutro, on condition that he use a money manager in trading his account and that duplicate account statements be forwarded to Sutro. But Smith then decided that he did not want to give discretion to another broker to trade his account. Rather, he opened the outside firm accounts, intending to direct his own trading. In doing so, he concealed his employment at Sutro, thereby preventing account statements from being forwarded to Sutro. Further, Smith indicated, in these outside accounts, that he was not to be called with reports of execution of his orders; he would call himself to check on execution.

10. Such conduct violated Sutros internal policy regarding accounts away from Sutro.

Sutros policy on Employee, Family and Related Accounts stated that all employee or family accounts needed to be maintained at Sutro unless the Legal or Compliance Department gave specific, written approval for such account(s). Smith was required to disclose his and his wifes accounts to the Legal and Compliance Department when the accounts were established and in response to annual inquiries by the Legal and Compliance Department.

11. In February 1999, Smith opened an account at the outside firm for himself and, later,

his wife (the Joint Account) and an individual retirement account for himself (the Smith IRA).

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12. In completing the new account form for the Joint Account, Smith originally identified himself as Self-employed but crossed that out and wrote Retired when asked to identify his employer. He did not indicate employment in the securities industry.

13. In completing the new account form for the Smith IRA, Smith wrote Self when

asked to identify his employer, and he specified Use home address when asked to identify his employers address. He also responded Self when specifically asked whether he was self-employed, and again refrained from indicating employment in the securities industry.

14. In March 1999, Smith filled out a new account form to open at the outside firm an

IRA for his wife. The new account form did not require Smith to disclose his own employment information. The new account form also listed Smith as the primary, and only, beneficiary on the account.

15. Two of the already opened outside accounts were transferred to Sutro in May 1999,

but, that same month, Smith opened another account at the outside firm, a trading account for himself, and again misrepresented his employment status by checking the box on the form indicating that he was self-employed, without indicating employment in the securities industry.

16. In January 2000, in an annual employee questionnaire on conflicts of interest, Smith

indicated that he had no account outside of the Firm.

Trading Ahead of or Contemporaneously with His Buy Recommendations

17. Smith effected purchases of common stock in the outside firm accounts prior to or contemporaneously with the issuance of research reports he had prepared and authored which contained his buy recommendations concerning such stocks.

18. Each of Smiths transactions violated one or more provisions of Sutros internal

research department trading policy which: (a) prohibited Smith from entering trades involving securities which he followed in his capacity as Research Analyst without first securing the written approval of his Director; (b) prohibited Smith from entering trades in securities which he followed within five business days before or after any change in Sutros research opinion or rating of the security; and (c) with respect to positions initiated or increased in securities followed by the Sutro research department, required Smith to hold such securities for a minimum of six months unless he received the prior written approval of specified Sutro personnel.

Trading in XYZ

19. On April 16, 1999, at 9:02 am, Sutro issued a research report which upgraded Sutros opinion on a particular stock (hereinafter XYZ) from a Hold to a Buy rating (the XYZ Buy Recommendation).

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20. Smith had prepared and authored the XYZ Buy Recommendation prior to its issuance. He also discussed his recommendation with Sutro sales personnel on the previous afternoon, April 15.

21. The XYZ Buy Recommendation stated, in part: In our view, this acquisition

catapults [XYZ] to the number one position within [its] industry with nearly a 30% market share. The next largest player has a market share of roughly 4%. Accordingly, we are upgrading our opinion on [XYZ] from Hold to Buy.

22. On April 15th, the night before the written Buy Recommendation Report was formally

issued, but after Smith had discussed the forthcoming recommendations with the Sutro sales force, Smith placed on-line orders to buy XYZ shares in three of the accounts at the outside firm namely, 200 shares of XYZ for his wifes IRA, 1500 shares for the Smith IRA, and 1000 shares for the Joint Account.

23. Smith never sought written permission from anyone at Sutro for his transactions in

the shares of XYZ, which he followed as a research analyst for Sutro, and did not disclose his intended purchase.

24. The 200 shares bought in his wifes IRA were sold on February 7, 2000 for a profit of

$902.49. Trading in UVW

25. On April 20, 1999, Smith bought 500 shares of a particular stock (hereinafter UVW) for the Smith IRA at the outside firm after he had been advised to update his research recommendation to a buy rating

26. Smith never sought written permission from anyone at Sutro for his transaction in the

shares of UVW, which he followed as a research analyst for Sutro.

27. The next day, on April 21, 1999, at 9:37 am, Sutro issued a research report upgrading Sutros opinion on UVW from an Accumulate to a Buy rating (the UVW Buy Recommendation).

28. The UVW Buy Recommendation stated, in part: We are taking advantage of the

recent weakness in drug stocks to upgrade [UVW] from an Accumulate to Buy [UVW] has been the fastest growing major pharmaceutical company over the period 1990-1998 as EPS have increased at a rate of 18% per year. For the forecast period of 1998 to 2002, we project that EPS will increase at a similar rate. We have more confidence in [UVWs] ability to achieve our EPS targets than is the case with any other drug company.

29. The UVW Buy Recommendation failed to disclose Smiths intended purchase of the

stock.

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Trading in RST

30. On December 17, 1999, Smith bought 100 shares of a particular stock (hereinafter RST) for his wifes IRA at the outside firm.

31. At the time of the purchase, Smith had been studying RST as a research analyst for

Sutro.

32. Subsequently, Smith was authorized to prepare a research report on RST, and on December 30, 1999, at 8:09 am, Sutro issued a research report initiating coverage of RST with a Buy rating (the RST Buy Recommendation).

33. The RST Buy Recommendation stated, in part: [RST] Has A Highly Promising

Platform Technology We are recommending purchase of RST, a company that is a world leader in the development and commercialization of monoclonal antibodies for therapeutic and diagnostic applications in medicine This breadth and depth of skills has created a platform technology with enormous promise to develop new drugs, principally for cancer. (Emphasis omitted.)

34. The RST Buy Recommendation failed to disclose that Smith had a beneficial interest

in RST stock.

35. Smith sold the 100 shares in his wifes IRA for a profit of $1,308.78 on February 7, 2000.

DISCUSSION

Mr. Smith engaged in a long-lasting course of misconduct. Concerned about his future, he determined to take undue advantage of his professional situation. He opened accounts at an outside firm, undisclosed to his employer, in which, on three separate occasions, he purchased stocks which he was researching for his employer. In doing so, he threw away his previously unblemished record as a trusted and well-respected professional. Mr. Smith argues that the transactions at issue in this matter were de minimus in their size and in their profits. But these transactions were part and parcel of an ill-conceived course of conduct, an effort at managing his own funds outside the scrutiny of his employer. True, this was not an effort to amass large profits; rather, Mr. Smith wanted to test his investment skills, should he have to leave his employment. He was at this time concerned that his employer might close its New York office, or that he might himself have to take time to deal with family problems. However, Mr. Smith was financially secure and his fears of job loss were overwrought. Mr. Smith points out that interested Firm sales force was generally informed of his forthcoming report some hours before its actual publication. Thus, Mr. Smith argues that his purchase of stock at the time his research reports were issued were de minimus in impact, insofar as he had already informed Firm sales personnel of his recommendations. But this was not true of the

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purchase of UVW, which occurred prior to the issuance of his buy recommendation. Moreover, we believe that, in all the transactions at issue here, Mr. Smith expected to make his purchases prior to the full pricing impact of his recommendations. In this regard, Mr. Smith noted that his purchase of RST occurred while he was not following the stock for the Firm, two weeks prior to the issuance of his authorized report on the stock. This is so, but his prompt work towards a report following his purchase indicates a desire to gain advantage from the purchase. This conduct is further compounded by his failure to disclose that he held the stock when the report was issued, a clear violation of then existing standards for securities analysts. Exchange Rule 472.40(2), as applicable at the time, set forth the requirement that a report recommending a security must disclose if the member organization or its employees involved in the preparation or issuance of the communication may have positions in any securities of the recommended issuer. Mr. Smith points out that his employer used a standard disclaimer in issuing research reports. But Mr. Smith plainly owed his employer the knowledge of any actual conflicts of interest in issuing research reports. Mr. Smith also was well aware that proper procedures at his employer required that he sell off any positions in a stock he held prior to issuance of his report on that stock, and then reestablish his position after the recommendation. He indicated that he had followed that procedure with respect to another stock, not at issue in this matter. Mr. Smith argues that the Firm, aware that he had accounts at a related firm, Tucker Anthony, could have discovered, in analyzing those accounts, that funds had been transferred to his outside accounts. But the Firms failure to do so does not excuse Mr. Smiths deliberate efforts to conceal the outside accounts; it merely delayed discovery of his misconduct. There could be no mistake as to Mr. Smiths ethical obligations. The professional obligation to disclose outside accounts to ones employer, and to disclose interest in securities traded were absolutely clear. At the end, Mr. Smith recognizes culpability, but seeks mitigation of his penalty. In determining penalty, the Hearing Panel recognizes that Mr. Smith, prior to these events, was a person of high professional responsibility and reputation; that personal problems at the time affected his professional judgment; that his misguided trading efforts were limited; that he has already suffered a period of suspension and of unemployment in the securities industry because of these events; and that he has admitted his culpability and expressed contrition. We have taken these factors into account. But he cannot escape the fact that he threw away his professional judgment and integrity for conduct which, he himself recognizes, had no good reason. The Hearing Panel is cognizant that the penalty here imposed may end Mr. Smiths career, but his prolonged lapse of ethical judgment deserves no lesser sanction.

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DECISION The Hearing Panel, by unanimous vote, found Mr. Smith guilty as charged.

PENALTY In view of the above findings, the Hearing Panel, by unanimous vote, determined that Mr. Smith be censured and barred from membership, allied membership, approved person status, and from employment or association in any capacity with any member or member organization for a period of two and one-half years. For the Hearing Panel Milton M. Stein Hearing Officer