SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 34-41804 / August 27, 1999

Admin. Proc. File No. 3-9682

OPINION OF THE COMMISSION

REGISTERED OPTIONS EXCHANGE -- REVIEW OF DISCIPLINARY PROCEEDING

Violations of Exchange Rules

Conduct Inconsistent with Just and Equitable Principles of Trade

Failure to Obtain Advance Written Approval for Discretionary Trading in Options

Former associated person of member of national options exchange failed to obtain advance written approval from customer and firm for discretionary trading in customer account. Held, review proceeding is sustained.

APPEARANCES:

James J. Moylan, of Arnstein & Lehr, for William J. Murphy.

Andrew D. Spiwak and Christopher R. Hill, for the Chicago Board Options Exchange, Inc.

Appeal filed: February 26, 1998

Last brief received: December 18, 1998

I.

William J. Murphy appeals the decision of the Chicago Board Options Exchange, Inc. ("CBOE" or "Exchange"). The CBOE found that, while employed by Oppenheimer & Co. ("Oppenheimer"), a CBOE member, Murphy violated CBOE Rules 4.1 and 9.10(a) when he traded without prior authorization from a customer and when he conducted discretionary trades without prior written authorization from a customer and written approval from a registered options principal at Oppenheimer.¹ Murphy denies the rule violations and seeks reversal of the CBOE's action or a reduction in sanctions. We base our findings on an independent review of the record.

II.

During the relevant period, Murphy was a registered representative and senior vice president of Oppenheimer in its Chicago branch office. This case arises out of Murphy's conduct with respect to the accounts of two of his customers, Thomas Tiernan and Robert Maciorowski.

Trading in Tiernan's Account

Tiernan opened his account with Murphy in January or February 1994 after hearing of Murphy's success with the account of one of Tiernan's acquaintances, Jean McCall, who had been one of Murphy's customers for six months. In opening the account, Murphy neither sought nor obtained written authorization from Tiernan or from Oppenheimer to exercise discretion in Tiernan's account. However, Tiernan told Murphy that he would like the activity in his account to "mirror" the activity in McCall's account. Because McCall's account was eight to ten times larger than Tiernan's, Murphy traded Tiernan's account similarly but in smaller amounts. Murphy occasionally discussed trades with Tiernan before executing them, but usually he did not. Murphy did not discuss with Tiernan the trades at issue here -- two opening options transactions, one transaction in Lehman Japanese yen put warrants, and four opening stock transactions. Indeed, Tiernan was travelling and was out of contact with Murphy when these transactions were executed.

Following his return to the United States, Tiernan complained first to Murphy and then to Oppenheimer about mishandling of and unauthorized transactions in his account. He spoke with Gery Sadzewicz, the compliance officer at Oppenheimer,and with Oppenheimer's Chicago branch manager, Carl Chaleff, both of whom were registered options principals. Tiernan told Chaleff that he had not authorized several transactions in his account. Chaleff and Sadzewicz questioned Murphy, who told them that Tiernan had given him verbal authorization to use discretion in the account. Several months after the trades at issue (and after Tiernan voiced his dissatisfaction to Murphy), Murphy for the first time sent Tiernan a discretionary authorization form. Tiernan did not sign it.

Trading in Maciorowski's Account

On March 16, 1994, Murphy purchased 2,000 Morgan Stanley Japanese yen put warrants ("Morgan Stanley warrants") for Maciorowski's account, with Maciorowski's prior consent. The same day Murphy also purchased 3,000 Morgan Stanley warrants for the account of another customer. On March 23, however, Oppenheimer prevented that customer's account from accepting the warrants because of a margin calculation error in that customer's account. Because Maciorowski had recently purchased Morgan Stanley warrants, Murphy transferred the other customer's 3,000 warrants into Maciorowski's account. Murphy did not ask Maciorowski's permission for this transfer. When Maciorowski discovered the additional 3,000 warrants, he complained to Murphy, who attempted to transfer them into the other customer's account. Oppenheimer did not approve the transfer, and Maciorowski incurred a loss on the position. Murphy sent a memorandum to Sadzewicz outlining these facts. Maciorowski complained to Sadzewicz, who handled the complaint.² In a mid-August meeting with Sadzewicz and Maciorowski, Murphy admitted to Sadzewicz that the trade had not been authorized by Maciorowski. Sadzewicz reported this admission to Chaleff.

* * *

Oppenheimer suspended Murphy for two weeks without pay while it investigated the complaints of Tiernan and Maciorowski. Upon completion of its investigation, Oppenheimer asked for, and received, Murphy's resignation in early September.³

On January 8, 1997, the CBOE began a disciplinary action against Murphy. After a hearing, the Business Conduct Committee ("BCC" or "Committee") found that Murphy's conduct violated Exchange Rules 4.1 and 9.10(a). It imposed on Murphy a two-month bar from association with any Exchange member organization, a fine of $10,000, and a censure. Murphy appealed, and the CBOE Board of Directors affirmed the decision of the BCC in an opinion issued July 22, 1998. This appeal followed.

III.

A. Murphy's handling of Tiernan's account was inconsistent with just and equitable principles of trade and, with respect to the options trades, violated CBOE Rule 9.10(a). Murphy admits all of the facts underlying the charge that he exercised discretion in Tiernan's account without obtaining prior written approval from his firm and his customer. Murphy admits that he failed to consult with Tiernan in advance of each trade. He admits that, though he traded pursuant to Tiernan's verbal request to "mirror" the trading in McCall's account, he had neither written authorization from Tiernan nor approval from Oppenheimer for discretionary trading in Tiernan's account.

Because Murphy effected each transaction without specific approval from Tiernan, Murphy traded in Tiernan's account on a discretionary basis.⁴ Oppenheimer's Registered Representative Manual ("the Manual") required that Murphy obtain written authorization from the customer and written approval from Oppenheimer prior to engaging in discretionary trading. The Manual emphasized that, without proper discretionary authority, failure to consult with a client prior to entering an order for his account is "a serious violation of . . . [Oppenheimer's] policies and `just and equitable principles of trade.'"

Murphy violated CBOE Rule 9.10(a) with respect to purchases of the options contracts because he did not obtain prior written authorization from both the client and a registered options principal of the firm. In addition, his failure to obtain prior written authorization and approval with respect to all of the discretionary trading alleged was inconsistent with just and equitable principles of trade. Discretionary trading in a customer's account is a practice that is inherently susceptible to abuse. Specific advance authorization and approval is important to assure a firm that the trading is being done with the consent of the customer and to alert the firm that extra oversight of the sales representative's handling of the accountmay be necessary to protect against improper or unsuitable trading.⁵

B. Murphy also engaged in unauthorized trading in Maciorowski's account. Oppenheimer's compliance officer, Sadzewicz, testified that Murphy told him that the Morgan Stanley warrants had been transferred into Maciorowski's account without authorization. Murphy's memorandum to Sadzewicz confirmed this, stating: that Murphy properly obtained authorization from Maciorowski to purchase 2,000 put warrants on March 16; that Murphy improperly transferred 3,000 more put warrants into Maciorowski's account on March 23, based on Maciorowski's trading history, rather than on authorization from Maciorowski; that Maciorowski was unwilling to permit the warrants to remain in his account; and that Murphy found himself in trouble when he was unable to transfer the warrants to another customer's account. Murphy testified that he notified Maciorowski of the March 23 purchase of warrants in his account only after it had been effected. Murphy offered no contradiction to this evidence. This transaction plainly was unauthorized and as such constituted conduct inconsistent with just and equitable principles of trade.

IV.

As noted, Murphy does not challenge the factual findings necessary to support our findings of violations. Instead, he argues that we should dismiss this case for various procedural reasons. First, Murphy challenges the CBOE's jurisdiction with respect to the two charges involving Japanese yen put warrants and the charge involving stock purchases. He cites CBOE Rule 17.1(a), which establishes the Exchange's jurisdiction over disciplinary matters. Rule 17.1(a) states in relevant part:

A member or a person associated with a member . . . who is alleged to have violated or aided or abetted a violation of any provision of the Securities Exchange Act of 1934 . . . , the rules and regulations promulgated thereunder, or any constitutional provision[,] by-law or rule of the Exchange or any interpretation thereof or resolution of the Board ofthe Exchange regulating the conduct of business on the Exchange shall be subject to the disciplinary jurisdiction of the Exchange under this Chapter . . . . (emphasis added).

Murphy contends that the phrase, "regulating the conduct of business on the Exchange," modifies everything preceding it in the rule. He argues that, since the violations based on the Japanese yen put warrants and stock purchases do not involve "the conduct of business on the Exchange," the CBOE lacks jurisdiction over those violations.⁶ The CBOE counters that the disputed phrase modifies only the phrase directly preceding it. Accordingly, the CBOE states, its jurisdiction is restricted to "the conduct of business on the Exchange" only when a member or person associated with a member is charged with violating a resolution of the Board of the Exchange.

We agree with the CBOE. The CBOE's reading of the rule makes the most sense grammatically, given the placement of the disjunctives and commas in the Rule. Furthermore, Section 6(b)(1) of the Securities Exchange Act of 1934⁷ prohibits the CBOE from limiting its disciplinary jurisdiction to the conduct of business on the exchange. Section 6(b)(1) requires that any registered national securities exchange must be capable of enforcing compliance by its members and persons associated with its members with any provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the exchange. Murphy's reading of CBOE Rule 17.1 would impermissibly limit the Exchange's ability to enforce compliance with the provisions and rules of the Exchange Act that do not implicate the conduct of business on the exchange. It would also impermissibly limit the Exchange's ability to discipline members for violation of CBOE rules relating to conduct by members not involving business onthe exchange.⁸ Construing the phrase "regulating the conduct of business on the exchange" to modify the phrase "resolution of the Board of Directors" gives a common-sense distinction between Board resolutions addressing member conduct and those addressing other matters of corporate governance on which the Board may act by resolution.⁹ Accordingly, we find that the CBOE's exercise of jurisdiction was proper with respect to the Japanese yen put warrant and stock purchase transactions.

Murphy also argues that CBOE Rule 9.10(a) cannot apply to Murphy because, by its language, the rule refers only to member organizations and does not refer to persons associated with member organizations. CBOE Rule 17.1(a), however, states that the CBOE may discipline any person with regard to a violation committed by the member with which the person is associated, as if the violation were his own.¹⁰ There is no requirement in Rule 17.1(a) that a member organization that has committed a violation be charged in order for an associated person to be charged. In this case, Oppenheimer was in violation of Rule 9.10(a) because it did not have in its files the requisite approval to exercise discretion over options trading in Tiernan'saccount. Oppenheimer's failure was due to Murphy's misconduct. Therefore, the CBOE properly applied Rule 9.10(a) to Murphy.

Murphy next argues that he was deprived of due process because the charges concerning the stock purchases in Tiernan's account were unfairly vague. He states that, in the Amended Statement of Charges ("Complaint"), the CBOE cites four purchases of stock, but fails to describe them with adequate specificity. The relevant paragraph in the Complaint reads:

During the period from in or about April 1994 through in or about May 1994, Murphy effected four opening stock transactions on a discretionary basis in Tiernan's account without prior written authorization from Tiernan and written approval by Oppenheimer.

Murphy argues that, because there were more than four stock purchases during the described time period, he did not know which purchases were alleged as violative. Thus, he reasons that he was unable to defend against the charges.

This charge was not unfairly vague. Murphy effected only nine stock purchases in Tiernan's account during the period described in the Complaint. Murphy did not seek clarification in the eleven months from January, when the Complaint was issued, to the hearing in December 1994. A week before the hearing Murphy received from CBOE staff an exhibit book that included asterisks next to the relevant four stock purchases. This was adequate notice to enable Murphy to prepare his defense. Furthermore, Murphy has not shown that the CBOE's failure to specify the four relevant stock purchases resulted in prejudice. He admitted that he exercised discretion in Tiernan's account based on a verbal agreement and did not effectively counter Tiernan's testimony as to any of the stock purchases.¹¹

Murphy also contends that he was originally charged with "unauthorized trading," and that these charges were "abruptly" changed during the hearing to "trading without prior written authorization." The Complaint, however, charged Murphy with trading in Tiernan's account "without prior written authorization from Tiernan and written approval by Oppenheimer." Murphy's counsel demonstrated confusion during the BCC hearing when hecontended that "trading without prior written authorization" was the same as "unauthorized trading." That contention was incorrect, and the Panel corrected him at the time. The CBOE was clear from the outset with respect to its charges of trading without prior written authorization from the customer and written approval from a registered options principal within the firm.

Murphy further argues that his right to due process was violated by the use of hearsay evidence. CBOE Rule 17.6 states, and Murphy acknowledges, that formal rules of evidence do not apply in Exchange proceedings. He argues, however, that, because Maciorowski did not testify during the hearing and his statements were introduced by Sadzewicz, the Panel unfairly relied on hearsay evidence when it determined that Maciorowski did not authorize the transfer of 3,000 Morgan Stanley Japanese yen put warrants.

We have stated that "hearsay statements may be admitted as evidence and, in an appropriate case, may even form the sole basis for findings of fact." ¹² Moreover, contrary to Murphy's contention, the CBOE did not rely an any statement by Maciorowski. The CBOE relied on Murphy's admission to Sadzewicz. Murphy did not deny during his testimony at the hearing that he made this admission. Furthermore, as noted earlier, Murphy's memorandum to Sadzewicz corroborates the underlying facts alleged.

Finally, Murphy argues that the sanctions that the CBOE imposed on Murphy should be reduced to the extent, if any, that we reverse the CBOE's findings of violation. Murphy further argues that the sanctions imposed by the CBOE were punitive and are mitigated by the sanctions already imposed by Oppenheimer in payment of the settlement with, among others, Tiernan and Maciorowski. Our review of the CBOE's sanctions is governed by Section 19(e)(2) of the Exchange Act, which requires us to determine whether a self-regulatory organization's sanctions are excessive or oppressive or impose an unnecessary or inappropriate burden on competition.¹³ \ Because we sustain each of the CBOE's findings of violation, and because we believe that the CBOE's sanctions were not disproportionate, we uphold the CBOE's imposition on Murphy of a two-month bar from association with any Exchange member organization, a fine of $10,000, and a censure.

An appropriate order will issue.¹⁴

By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER).

Jonathan G. Katz
Secretary

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 34-41804
Admin. Proc. File No. 3-9682

ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED OPTIONS EXCHANGE

On the basis of the Commission's opinion issued this day, it is

ORDERED that the disciplinary action taken by the Chicago Board Options Exchange, Inc. against William J. Murphy be, and it hereby is, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

-[1]- CBOE Rule 4.1 prohibits conduct inconsistent with just and equitable principles of trade. Rule 9.10(a) requires advance, written authorization from both the client and a registered options principal for discretionary trading in options.

-[2]- The record is silent as to the date of Maciorowski's complaint to Sadzewicz. Sadzewicz testified only that, in relation to the August meeting, he had received Maciorowski's complaint "earlier in the summer."

-[3]- Oppenheimer subsequently entered into settlements with Tiernan and Maciorowski. Murphy contributed $20,000 toward the settlement with Tiernan, which was based on several other factors, such as high commissions, that had dissatisfied Tiernan. Murphy contributed $9,995 toward the settlement with Maciorowski.

-[4]-Murphy concedes this point, too, in the context of his argument, discussed infra, that the Exchange originally charged him with unauthorized trading in Tiernan's account. He argues that because he was trading on a discretionary basis, he did not need authorization for each transaction.

-[5]- Our view of the importance of Oppenheimer's policy in ensuring conduct consistent with just and equitable principles of trade is informed by CBOE's analogous Rule 9.10(a) for options trading. Cf. Atlanta-One, Inc., 52 S.E.C. 161, 163 n.7 (1995) (Principles underlying application of NASD rule regarding commissions on trading of over-the-counter securities are relevant to charges of unfair commissions in trading of exchange securities brought under rule regarding just and equitable principles of trade.)

-[6]- Murphy also argues that the Designated Options Examining Authority (DOEA) system, under which a designated self-regulatory organization (SRO) may seek authorization to enforce the rules of another SRO of which a firm is a member, prohibits the CBOE's exercise of jurisdiction over the non-CBOE-listed Japanese yen put warrants and stock purchases. The DOEA system, however, becomes relevant only when one SRO is enforcing the rules of another SRO. As the CBOE is enforcing only its own rule against practices inconsistent with just and equitable principles, there is no issue raised regarding the DOEA system.

-[7]- See 15 U.S.C. 78f(b)(1) (1988).

-[8]- We have consistently permitted the CBOE to exercise jurisdiction over violations of its rules where the violative conduct did not occur on the Exchange. See, e.g., In re Philip S. Wilson, 48 S.E.C. 511 (1986) (misappropriation of money from partners, in violation of CBOE 4.1); In re Lashco, Inc., 48 S.E.C. 783 (1987) (finding violation of CBOE Rule 17.2, for impeding Exchange investigation); In re John F. Lebens, 52 S.E.C. 606 (1996) (violation of just and equitable principles may be based merely on unethical conduct).

-[9]- Murphy cites In re Thomas Blanton, 52 S.E.C. 250 (1995), but that case does not help him. In Blanton we found that the particular American Stock Exchange ("AMEX") rule which the respondent was charged with violating was limited, by its express language, to options traded on the AMEX. We did not say that AMEX's jurisdictional rule limited the exchange's ability to take disciplinary action against a member based on conduct occurring off-exchange. To the contrary, we stated in dicta that the AMEX would have had disciplinary jurisdiction had it brought the proceedings under its rule requiring conduct consistent with just and equitable principles. Blanton is therefore inapposite here.

-[10]- See also Lebens, supra 52 S.E.C. 606 (finding that, pursuant to CBOE Rule 17.1(a), an associated person could be charged as a direct violator of actions which resulted in recordkeeping violations by the firm).

-[11]- We note that, at one point during the hearing, Murphy asserted that he had received express authorization from Tiernan for the purchase of Long Island Bank Corp. stock, one of the four discretionary purchases that the CBOE alleged. Murphy has not raised this issue on appeal. In any event, this statement was inconsistent with his own earlier testimony, and the CBOE found Tiernan more credible than Murphy on this point.

-[12]- In re Mark James Hankoff, 50 S.E.C. 1009, 1012 (1992) and cases cited therein; see also In re Michael A. Niebuhr, 52 S.E.C. 546, 552 n.33 (1995); In re Charles D. Tom, 50 S.E.C. 1142, 1145 (1992) and cases cited therein.

-[13]- 15 U.S.C. § 78s(e)(2). Murphy has not argued, and we do not find, that the CBOE's action has created a burden on competition.

-[14]- We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed herein.