NEW YORK BEAR,STEARNS CO.INC. & MEMBERORGANIZATION
STOCK EXCHANGE, INC. December 22,2005
'* violated NYSE Rule 80A by permitting ngency index arbitrage basket orders to be erecutedwithout required ,,plusticK' notationwhen collar was in pface;violated Rules 17a-3and l7a-4 under securitiesExchangeAct of 1934 and IIYSE Rule 440 by having booksand recordsthat did not reltect index arbitrage trading with specificityand failed to timely report index arbitrage trades; violated NYSE Rule 4408 and Rule l0a-l undeisecurities Exchanie Act of 1934by transmitting index arbitragebasketin which certain issues violatedshort salerule; violated IrIysE Rule 342 by failing to have adequate systems and written pro-cedures regardingindex ainitrrgi trading, trading collars' short salesand derivativestrading, to adequately superviseactivitles in customer'saccounts, and to detectand preventreseaichanalyst's videotapedappearance Internet road show,salesliterature, or similar on communicltions from being madeavaitableto public without advance supervisoryapproval; violated nrysE Rule 405by failing to: (a) use due dlllgenceto learn essential facts relativeto everycustomir and every order; and (b) diligently supervise all nccountshandled by registered representative; violated ExchangeRule 47zby making available,to customers public, salesliterature or similar type of communications or without prior supervisoryapproval and by utilizing communicationin counection with investmentbanking transactionthat was not fair and balanced Consentto censureand $1.5million fine. Appearances: For the Division of Enforcement Linda S. Riefberg,Esq. Joy A. Weber,Esq. Jeanne Elmadany, R. Esq. John C. Saxton, Esq. Jr., *:|{. A HearingPanelof the New York Stock Exchange, Inc. ('NYSE" or the ..Exchange") met to considera Stipulationof Factsand Consentto Penaltyentered -Steatns into betweenthe Exchange's Division of Enforcement ("Enforcement")and Bear, & Co.Inc. (..Respondent Firm" or the "Firm" or "Bear Stearns"). Without admittingor denyingguilt, Responaent Firm consented to a finding by the Hearing Panelthat it: For the Respondent David Weintraub,Esq.
2. Violated NYSE Rule 80Awhen Respondent Firm permittedagencyindex arbitrage basketordersto be transmitted and executed the Floor of the I{YSE witho; to, on, the "plus tick" nolationrequiredfor arbitrageindex trades when a collar was in place.
II.
Violated Rulesl7a-3 andl7a-4underthe Securities Exchange of 1934(the Act "ExchangeAct") andNYSE Rule 440 in that Respondent Fiim's booksand records did not reflectwith specificityits index arbitragetradingand failed to report index arbitragetradeson its DerivativesProgramTrading Report("DPTR') tothe NySE in a timely fashion. violated l.IYsE Rule 4408 and Exchange Rule l0a-l when Respondent Act Firm transmittedto the Floor of the NYSE an index arbitragebasketin which certainissues in the basketviolatedthe short-sale rule. Violated I.IYSE Rule 342 in that Respondent Firm failed to: A. Have written procedures compliancewith NYSE Rule g0A. for B. Have in placea systemto calculate, determineand inform employees when a tradingcollar was in place.
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ry.
C. Have in placea systemthat would inhibit baskettradeswithout the appropriate
tick indicatorfrom beingtransmitted the Floor of the NysE when-aRute goa to resfrictionwas in place.
D. Have written procedures regardingits index arbitragetradingactivitiesand a
systemto review tradesfor accuracy prior to transmission the Floor of the to NYSE and to havein placeinhibitorsthat would preventtradesthat exceeded the tradingdesk'sdaily tradinglimits in equitiesand derivativesfrom being mnsmitted to the Floor of the NfSE. 4408 and. Exchange Rule l0a-1. Act
E. Adequatelyeducate Firm personnel to the provisionsof NySE Rulesg0A as
F. Monitor adequately, a real-timeand trade-date-plus-one on basis,its index arbitragebusiness because failed to createreportsthat reflectedtrading it aggregated department ensurereview for accuracy order entry and by to of compliance with NySE Rules.
G. Evidencesupervision its derivativestrading and havereportsthat would of
facilitatethis review. H . Adequatelysupewisethe activitiesof a registeredrepresentative the and activitiesin a customer'saccounts.
3 L Detectandprevent: a research analyst'svideotaped appearance an Internet on roadshow;salesliteratureor a similar cornmunicationt Ueingmade availableto customers the public, without advance or supervisory and utilization of a communication connection in with an investment "pprou"l; U"nting transaction that was not fair andbalanced because failed to disctosethe poteniial risks of an it invesfitent in the offering.
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violated NYSE Rule 405 in that Respondent Firm failed to: A' Use duediligenceto leam the essential factsrelativeto every customerand every order.
B. Supervise diligently all accounts handled a registered by representative. V[ Violated ].IYSERule 472 in that it: A' Made availableto customers the public, salesliteratureor a similar or tlpe of communication, without prior supervisory approval. Utilized a communication connection in with an investment bankingtransaction that wasnot fair and balanced because failed to disclosetrr"l"i"titiul risks of it an investment the offering. in
B'
For the solepurposeof settling-thisdisciplinaryproceeding, Enforcement and Respondent Firm stipulateto certain facts,the substance oiwhic-h'firllows:l Background snd Jurisdiction l. Bear, Steams& co. Inc. (*Bear stearns"or the ..Firm') is the global investment banking,securities trading andbrokerage arm of pareni"o*p*y The Bear stearns companiesInc. Bear, stearnsSecuritiJscorp., awholly owneosubsidiary of Bear
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singletransaction basket and trades ofuott, New york stoc[ nx"rraniJt;.r.iidBf andNational Association Securities Dgalers ("NASD') indexproducl unae*proy.a involvingthese products. pirm utitizea B-.i*g.t' itre ledgi$ strategies U" SuperDot system deliverthese to equities derivatives and trades theFloorof the to
The facts,allegations, and conclusionscontainedin paragraphsl-58 are taken li.om the executed stipulation of Factsand Consentto PenaltybetweenEnforcement andRespondent.No changes havebeenmadeto the stipulatedparagraphs the Hearing Panel, by exceptthat certainnameshave becndelctedto protectthi privacy of ion-parties, or as otherwisenoted.
At all times relevant,the Firm was engaged index arbitrage in trading involving
4 Exchange. addition,the Firm:providedequity research, [n mergerand acquisition advise;venturecapital and underwritingserviceson a global basisand engaged in, retail and institutionaltrading. Summrrv of Violrtive Conduct
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3 . On threeseparate dates, July 6, 2001,October2,2002 andMay 30, 2003,the Firm
violated certainExchange rulesandregulations concerningthe SecuritiesExchange Act of 1934("SEA") in connection with its derivativestrading. 4. Further,during the period January1998through December2002 the Firm violated certainExchange rulesconcemingthe supervisionof accounts controlledby a foreign customer. The Firm also failed to useduediligence to learn essential factsrelativeto this foreign customerand this customer's orders. Steamsresearch analystappeared an Intemet road show for a public offering for on which the Firm was lead underwrite. The analyst's comments the Internetroad on show, which were madeavailableto Firm customersandpotential investorsthrough the Firm's website,did not present and balancedinformation regardingthe fair potentialrisks and rewardsof an inveshnent the offering. in Trading Violations 6. NYSE Rule 80A, in effect at the time relevantherein,requiredthat on a trading day that the Dow JonesIndustrialAverageC'DJLA') declinedbelow its closing value on the previoustrading day by at leastthe'two-percent value" as calculatedin accordance with the Supplementary Material to this Rule,2all index arbitrageorders to sell any componentof the S&P 500 StockPrice Index C'SPX") must be Jntered with the instruction"sell plus." Further,on a trading day that the DJIA advanced aboveits closing value on the previoustrading day by at leastthe'two-percent value," all index arbitrageordersto buy any componentof the SPX must be entered with the instnrction"buy minus."3 The purposeof NYSE Rule 80A is to reduce marketvolatility.
5 . In addition,during the periodApril 26, 2003through May 8, 2003, a video of a Bear
Pursuant NYSE Rule 80A.10, as in effect at the relevant time, "ftJhe "two-percentyalue" shall to be calculatedat the beginning ofeach calendarquarterand shall be two-percent(2yo),rounded down to the nearestl0 points,of thc average closing value of the DJIA for the last month of the previousqualter." The restrictions governed by NYSE Rule 80A were removed only il in the caseof certain sell orders,the DJLAsubsequently reached value below its closing value on the previoustrading day a that is a declineequal to the "one-percent value" or less as calculatedin accordance with the Supplementary Material to this Rule and in the caseofcenain buy orders,the DJIA subsequently reached value aboveits closing value on the previous trading day that is an advanceequal to the a "one-percent value" or less. Suchrestrictionscould be re-imposedif the DJIA againreachedthe "two-percentvalue."
5 7. Rule 4408 andSecurities Exchange Regulationl0a-l states pertinentpart that Act in no membershall,for his own account for the account any person,effecf on the or of Exchangea shortsaleof any security;(i) below the price at which the last sale thereo[,regularway, was effectedon the Exchange; (ii) at suchprice unlesssuch or price is abovethe next preceding differentprice at which a saleof suchsecurity, regular way, was effectedon the Exchange. ExchangeRule 342 states essenc€ in that:"[e]ach office, department business or activity of a member member or organization...shall underthe supervision be and control of the memberor memberorganizationestablishing andof the personnel it delegated suchauthorityand responsibility." Exchange Rule 342(b)providesthat "[t]he generalpartners directorsof each or memberorganization shallprovide for the appropriate supervisory control and shall designate ganeralpfitner or principal executivcofficer to assume a overall authority and responsibilityfor internalsupervision and control of the organizationand compliancewith securities laws and regulations. This penionshall: (l) delegate qualifiedprincipals employees to or responsibility and authorityfor supervision and control of eachoffice, department business or activity, and provide for appropriate procedures supervision of and contol. establish separate a systemof follow-up andreview to determine that the delegated authority andresponsibilityis beingproperlyexercised.
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Exchange f.ule a40 andRegulations17a-3and l7a-4 ("Regs. l7a-3 and l7a-4") of the Securities and Exchange of 1934(*SEA') in essence Act requirethat every membernot associated with a memberorganizationandeverymemberorganiiation shall makeandpreserve booksand recordsas the Exchange may prescribe. Exchange-Rule requiresevery memberorganizationto usedue diligence to leam 405 the essentialfacts relative to every customer, every order, and every cah ot margin accountaccepted carriedby suchorganization. or
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The Julv 6.2001 Violations
t2. on July 6, 2001,the Firm transmittednine agencyindex arbitragesell programs
(akla basketindex uades)on the Firm's automatedsystemto the Flooi oithe Exchange over SuperDotwithout the required"sell plus" notation,when the DJIA had declined2l0 points from the closeof the previousday and tick restrictionsset forth in Rule 80A were in place.
1 3 . Further,the Firm's booksand recordswere insufficient as they did not capture,with
specificity, its index arbitrage tra{ing and failed to reportthe nine-indexarbitrage tradestransmittedto the Floor of the Exchangeon July 6, 2001on its DerivativJs
6 ProgramTradingReport("DPTR") in a timely fashion. The Firm provideddataon thesetrades monthsafter the tradesoccurredsubjectto a requestfrom the Exchange.
1 4 . During timesrelevanthereto,the Firm's derivatives traderswere involved in trading
TradedFunds("ETFs"). ETFsare index fundsrepresenting basketof Exchange a stocksthat tradeon the AmericanStockExchange ("AMEX") andthe I.IYSE throughoutthe day, with intra-daypricing. The ETFsoffer diversity in the combinationof stocksin the basketthat reflectthe performance the market index, of industry or sectorin one security.4
1 5 . The Firm utilized a datafeedthat advisedits tradersof changes the DJIA for in
purposes.The traderstook advantage changes the DJIA by selectinga business of in pre-configured basketand executinga long transaction engagingin various or hedgingstrategies the Firm's proprietaryaccountor accountsfor which the Firm for as agentincluding affiliates. actd 1 6 . On July 6, 2001,the Firm engaged index arbitrage in trading without having a system to calculate, determineand inform its traders that a collar was in place and failed to have in placea systemthat would inhibit tradesfrom beingtransmittedto the Floor of when a rule 80A restrictionwas in placewithout the appropriate the Exchange tick indicators.
t 7 . At the time, the Firm's tradersperformeda manualcalculationof changes the in
DJIA for Rule 80A purposes disseminated informationto eachother by word this and of mouth. 1 8 . In additionto the systems and procedural deficits, the Firm failed to adequately itstradersregardingprocedures educate when a Rule 80A collar is in place. The October 2. 2002Violations 19. On October2,2002, the quantityof an index arbitrage order was misstatedand a $4 billion ratherthan a $4 million dollar tradewas transmittedfiorexecution. Portionsof suchorderviolated Exchange Rule 4408 (the shortsalerule) in 38 of the issuesin the order sentto the Floor of the Exchange. The Firm's BasketTrading System(*BTS") lackeda tradeconfirmationor pop-up feahue for the hader to confirm the trade and lackeda feature(inhibitor) to prohibit the transmission tradesthat exceeded of the tradingdesk'sdaily $2 billion limit.
20. On October2,2002,the Firm was long 2.5 billion Standard Poor500 (*S&P-) & componentstocks; short futures, and short S&P 500 Stock Price Index ("SPX") and S&P DepositoryReceiptsalkla*SPYDERS". During the trading day, the Firm traded
The Firm was cngagedin index arbitragetrading, a hedgestratery in which the Firm was long certainsccuritieswhich are part of the S&P500 againstwhich they createa short utilizing ETFs on the American Stock Exchangeas options. The spreadmade in thesetrades representsthe arbiragc opportunity.
7 index arbitrage baskets againstfuturesandSPYDERSfor the accountof a foreign broker-affiliate. Bearstearnshaddiscretionover that account.
2t. A_tapproximately3:30 p.m. in the afternoon,a traderat the Firm engaged a series in
of hedgetradesthatbeganwith coveringa short SPYDERSpositioriU-y purchasing SPYDERSon the AMEX thenhedgingiheposition by selling an equivaientbasket of S&P 500 component stockson the Exchange.
22. At all timesrelevant,the Firm's BTS routedordersto the Firm's programTrading
Systemwherea branchcodeandsequence numberwas assigned eich order prior to to transmission the appropriate to exchange.The basketin iiris instancewas transmittedover SuperDotto the Floor oflhe Exchange.
23. At approximately3:40 p.m. the sametraderenteredan order to sell an equivalent
basketof s&P componentstocksto hedgea 50,000-lotspyDERs position. The trader,utilizing a systemthat hadbeenoiiginally designedfor futurer.rrOoptiorrs orders;failed to recognize the orderenfiy systemhe was utilizing tbat was automaticallyaddingthreezerosto the qu*iityfi"ld and his order oi50,0oo lots of SPYDERSvaluedat $4 million was in fact enieredas 50 million lots of SpYDERS with a valueof $4 billion dollars.
24. The traderrecognized error almostimmediatelyafter transmission the and cancelled
as many of the ordersaspossiblevia SuperDotani throughFloor personnel. The traderhedgedthoseordersthat werenot cancelled
25. At all times relevant,the Firm's BTS systemdid not havein ptacea feature that
would requirethe traderto confirm thgelementsof the trade,including quantiiy, prior to the tradebeing transmitted.This tradeinformation confirmation feature (sometimes referredto againsterrorsoccuringprior to -*-1"popup") is a safeguard transmission' very much like the error that occured inlhe current instance- Nor did 9" PTI hlve in place an inhibitor that would have blockedan order that exceeded the derivativesdesk's gding limit for the day ($2 bitlion). Had the Firm madethese provisionsto BTS to safeguard hading,th; $2 billion enor its would not havebeen processed transmitted the Floor of th" Exchange. and to
26. The BTS containedinhibitorsthat preventedordersfrom beingprocessed once
the total value of the ordersreached approximately $1.85 billion, wirictr when combined with trading earlierin the day, comprisedthe $2 billion trading limit for tne Aayfor this tlpe of derivativestradingby tire trading desk at issue.
27. As a result of the error, 4,433sell ordersof 499separate issues 30,000shares of each
were enteredin the Firm's systemfor transmission the Floor to of the B*.f,*g" *itf, an aggregate valueof $4 billion of which approximately $t.gs billion were transmittedto the Floor, andof which therewere violationsof the shortsalerule in 3g of the issuesinvolved in the enor trade. Of theseorders2,39lorders of Z91issues were Fansmittedfor executionwith a total value of $1.85Litfion of which 902 orders (183 issues)were executed the Exchange, on AMEX and orc markets.
28.
The Firm failed to hlve a systemof "pop-ups" in placethat would have requireda traderto confirm on BTS order entry dataprior to transmission; failed to have in placeinhibitors BTS thatwould btockthe transmission an orderthat exceeded on of the dollar tradinglimits for the day; and failed to havein placean order cancellation systemon BTS that could respond promptly to the demands the type of trading in of 'which it wasengaged.The Firm's order entry and cancellation systems added considerably thevolatility of the marketon octoberz,zo0z. to At all timesrelevantto the tradingdescribedabove,the Firm did not provide traders with reportson a real time basistf,at would permit themto review their order entries and executions separately from the rest of the Firm. The Firm's derivativestraders insteadcreated their own spreadsheets monitor their positions,which documents to were not reviewedby Firm supervisors.
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The Mav 30.2003Violations 30On May 30, 2003,the Firm violated ExchangeRule 80A on two occasions when the Firm permittedagencyindex arbitragebasketordersto be transmittedto, and executed the Floor of the Exchange on without the "plus tick" notationrequiredfor arbitrageindex tradeswhen a collar was in place. to providedatato its tradersto monitor declinesin the DJLAfor Rule 80A purposes.
3 1 . FollowingtheJuly 6,2001 incident,the Firrn utilizeda split feedoffthe DJLAcircuit 32. On May 30, 2003,Rule 80A tick restrictionsbecame effectiveat approximately10:43
a.m. and.rer.nained effect to the closeof trading. in
33. At approximately10:32a.m.,the Firm temporarily shutdown its BTS due to
technologyissues, which aroseintra-day. During the shutdown,the trading collar thresholdwasreached, triggering the Rule g0A traderestrictions.
34. When the Firm broughtthe BTS up at I l:01 a.m.,thecollarswerestill in effect,but
the BTS did not recognizethe curb.
3 5 . At 2:31 p.m.andagainat2:32p.m.,the Firrn violatedExchange Rule g0A with the
entry of trvo baskettradeswhich lackedthe requiredtick indicator.
36. The Firm's technologydepartment its traderswereunawarethat when the system and
is broughtdown intra-day,the DJIA indicators had to be resetmanuallyby the trader. At all timesrelevant,the Firm did not have asystem to back up the BT-Swhich tradirs could utilized when the BTS was inoperable.
37. The-Firmnot only violatedExchange Rule 80A on two occasions May 30,200]., on
in !u1Aild to havein place a systemthat re-setsand monitorschanges the dffn fot Rule 80A purposes the systemis brought down intra-dayfor any purpose. if
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3 8 . At all timesrelevant,the Firm failedestablish, maintainand implement appropriate
procedures supervision controlof Firrn employees departmeniiinorder to for and and detectandpreventthe violationsdescribed aboveinvolving its derivativesindex arbitragetradingbusiness. Fallure to Supervise Accountswith Suspicious Activitv
39. ln 1994,SR openeda personalaccount Bear Steams,At the time, SR's occupation at
was listedon his new accountdocumentation the Chairmanof a certain Russian as bank ("RussianBank A"). SR maintained business a address Moscow, Russiaand in a homeaddress Luxembourg. Later,SR becameSecretary a commercialbank in of locatedin Russia("RussianBank B'). SR's wife was the Presidentof RussianBank B. Between1998and 2000,SR opened controlledten (10) accountsat Bear and steams,includingseveralaccounts the nameof Russian in Bank B, as well as accounts his own nameand in the nameof a financial firm (hereaftercollectively in referredto as SR's accounts).During 1998through2002, SRjs accountsrangedin equityfrom $50,000 $12 million. to
40. As early as 1995SR was the subjectof Russiannewsreportsalleging fraud and
financialimproprietiesat Russian Bank A while SR was chairman. buring the period 1998through2000,when SR opened additionalaccounts Bear Stlams ana at the Firm was doing business with S& the Firm failed to learnthe essentialfacts conceminghim as well detailsregarding accountsSR maintainedat the Firm in the the nameof variousentities. Had the Firm inquired,the Firm would have discovered theseessential facts.
4 1 . During the periodJanuary1998throughDecember2002,RR was the registered representative assigned serviceSR's accounts. During this sameperiod, therewere to in excess 20 wires into SR's BearStearns of accountstotaling in excessot$20 million. On morethan95 occasions, firndstotalingin excesrof stg million, were wired from SR's accounts.On approximately145 occasions total in excessof $15 a million wasjournaled between sR's variousaccountsat the Firm.
42. Many of the wires and/orjournals notedabovewere processed with out any
underlyingsecuritytransactions being effectedin thcaccountsreceiving thl funAs.
43. For cxamplein November2000,approximately$2 million wasjournaled between
two accounts the Firm that basedon accountdocumentation at maintainedby the Firm, appear be unrelatedaccounts.At the time of the transfers,therewele no to securities transactions the accountthat receivedthe funds. Approximately four in dayslater,the $2 million dollarswas wired to a US bank in the nameof an unrelated entity.
44. The frequencyand size of the wires andjoumals involving SR's accountsat the Firm, shouldhavesubjected them to further scrutiny and review by the Firm and its supervisory personnel, or aroundthe time they occurred, at iarticularly since several
10 of thesewires and/orjournalscoincidedwith suspicious investment activity in US TreasuryBills.
4 5 . For example, May 25,z}}l,approximately $6 million worth of US Treasury on Bills,
with a duedateof July 5, 2001,werepurchased marginin a Russian on Bank B accountmaintained the Firm. On May 29,2001,an additional at worth of $625,000 theseUS TreasuryBills werepurchased margin. Thesetransactions on were paid for by funds that werejournaledfrom anotherSR accountmaintained the Firm. Based at on accountdocumentation maintained the Firm, at the time thesetransactions by occurred,they appeared be unrelated to accounts.Thesepositionswere liquidatedon May 30, 2001 andJune4, 2001andthe funds werejournaledback to the accountthat funded the purchase.
46. During the period January1998throughOctober2002,the Firm had in placewritten
policies andprocedures weredesigned detectandpreventsuspicious that to transactions the type that occurred SR's accounts.Despitehavingsuchpolicies of in and procedures place,the Firm permittedthe suspicious in activity discussed aboveto continue in SR's accounts without making any reasonable inquiry into the transactions.Further,the Firm failed to discusswith RR the mannerin which SR's accountswere being handledandit failed to learn the essential factsrelativeto orders the Firm executed SR's accounts. for Although the Firm eventuallydetected the suspiciousactivity and reportedit to the federalauthoritiesin August 2002,the Firm did not reportthis activity with specificityto the Exchange until October 15,2002. 47. In light of the foregoing,asdetailedin paragraphs through46,t the Firm failed to 39 supervisethe activitiesof RR; the transactions ordersin the accounts and controlled by SR; and failed to supervise RR's handling of SR's accounts. Communicationswith the Public and Road Show Violations Analvst Particioation in an Internet Road Show 48. In April 2002,a Bear Steams research analystbeganworking with IB to obtain the IB mandatefor an anticipated initial public offering ("IPO") by XYZ,Inc. ("XYZ"). The analysthelpeddraft andwas featuredin the pitch book presented toXYZ, and he and IB had multiplepitch meetingswithXYZ. In June2A02BearSteamswas selectedas a co-leadunderwriterfor the XYZ IPO. As one of the first XYZ road show events,the Firm's ECM department arranged for XYZmanagementto makea presentation the Firm's salesstaffat Bear Steams' to headquarters New York Cityon April 25,2003. This presentation in consisted an of introductionof XYZ and its management personnelby the analyst,a presentation by XYZmanagement,and a questionand answerperiod during which both the analpt andXYZ management responded questions. to
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The equivalentreferencein the Stipulationof Factsand Consentto Penaltywas to paragraphs 36 through 43 of that document.
50. The analyst'sintroductoryremarksconsisted entirelyof his extremelyfavorable
opinionof XYZ's business, management, his opinionthat therewould be an its and extraordinary retum from an investment XYZ. During the questionand answer in response a question to posedtoxyzr"nager"nt, t'heanalyst projected P_919d'in XYZ would experience 20Yointernal growth in the comingyear. He askedXyZ management numerous questions eliciting favorableinformationregardingXyZ and the offering. Neitherthe analyst'sintroductionnor any of his commentsduring the questionand answer period includedany discussions risks associated of with an investment XYZ. in
From April 28,2003throughMay 8, 2003, avideotape the XyZ presentation, of includingthe analyst'sintroductoryremarksand the questionand answerperiod, was madeavailableto BearSteamscustomers potentialinvestorsvia a passwordand protectedwebsiteasthe lnternetroadshow ficr the XYZ IPO. Sixty-five Bear Stearns customers potentialinvestorsviewed the XYZ Internetroad show numerous and 1i-I1_duringthis period. The Firm was unawareof the analyst'sappeilanceon the XYZ Internetroadshowuntil l0 daysafter it had beonposteato thJ Firm's website.
52. From April 2002throughApril 2003,the Exchange6 conducted investigation an
regardingthe Firm's research IB activities. The investigation and revealedthat during the periodJuly 1999throughJune2001, BearSteaml engaged actsand in practices that created maintainedinappropriate or influenceby ils In A"p"rt*"nrou", research analystsOnepracticethat placedresearch analysts conflict was their in participationin dealroad shows.t In fact, during npritzbo:, the Firm had a policy generallyprohibitingsuchactivity.
53. Nonetheless, Firm failed to establishreasonable the procedures detectand prevent to
violation of this policy, which occurredwhen the video of the analyst'sintroduction andcomments during the questionand answerperiod was includedin the Internet roadshow.
The Exchangeconductedits investigationjointly with the SEC, NASD, National Association of statessecuritiesAdministratorsand New york statc Attomey Generat'soffice. In Hearing Panel Decision 03-63, issued Apnl 22,2003, the Firm consented to a penalty of a censure'a total paymentof $80 million and an undertaking which, when effcctive, among other things' would prohibit analyst participation in IB activities, including road shows. The underaking provision prohibiting researchanalyst participation in road shows did not become effective until December 2003. The postingof the XYZ road show to the Firm's website in April 2003 was not a violation of that settlementsince the case had not been finalized at that time. However,as the resultof the findings of the investigationand the negotiations, in April 2003, the Firm was well awarcthat its research analystsshould not be participatingin road shows.
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5 4 . Exchange Rule 472(a)provides pertinent that eachsalesliterature other in part or
similar tlpe of communication which is generally dishibutedor madeavailable a by memberorganizationshallbe approved advance a member,allied member, in by supervisoryanalystor persondesignated undertheprovisionsof ExchangeRule 342(bXl).
5 5 . Bear SteamsconductedIntemetroad showsin connectionwith investmentbanking
prior to XYZ. The productionof the Firm's lnternet road showsand transactions their postingto the Firm's websitewas managed entirely by an ECM administrative employee.
56. The Firm did not haveany policy or procedure undertakea supervisoryreview of to
materialspostedto the Firm's websiteas Intemetroad showseitirer befoie or after the Internetroad showswere madeavailableto its customers potential invgstors. and This includedthe XYZroad show.
57. T\exYZ lnternetroad show,which includedthe analyst'sappearance, a was communicationwith the public subjectto the Generalstandardsfor All Communications provision of Exchange Rule 472. 5 8 . Neither the analyst'sintroductoryconrments any of his other statements the nor on XYZ Internetroad show presented andbalanced fair information regardingthe potentialrisks and te*a.ds of an investment the offering. in DECISION The HearingPanel,in acceptingthe Stipulationof Factsand Consentto Penalty,found Respondent Firm guilty as set forth aboveby unanimous vote. PENALTY In view of the abovefindings, the HearingPanel,by unanimous vote, imposedthe penalty consented by Respondent to Firm of a censure and a $1.5 million fine. For the HearingPanel
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Officer \ejey'K"o - ChiefHearing Panefrsts:
RichardM. Jablonski JohnP. O'Brien