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Firm and Compliance Officer Sanctioned For Books and Records Violations – Independent Contractor Defense Rejected

vFinance Investments, Inc., Richard Campanella, Exchange Act Rel. 62448, July 2, 2010

Days since appeal – 1 year 6 months

Days since last brief – 2 months 18 days

vFinance and Campanella appealed an ALJ's initial decision. vFinance was a broker-dealer and Campanella its chief compliance officer and president. This is a significant case that reiterates the responsibility of the firm to maintain and produce records promptly to the SEC when requested.

The ALJ found violated the books and records provisions of the Exchange Act by failing to preserve and produce emails and instant messages regarding trading in a stock and that Campanella aided and abetted and caused the violations. Campanella was ordered to cease and desist, censured and fined $30,000. The firm was fined $100,000. The Commission upheld the sanctions on appeal.

The problems arose at a distant branch office that had only two reps, a father and son, with the son designated as the branch manager. Campanella and vFinance knew that the office was using outside email accounts contrary to firm policy and not saved hard copies of instant messages. The branch appears to have specialized in a single stock, earning $275,000 in commissions on 578 trades in a 26 month period. The SEC began an investigation into trading in the stock and demanded that the firm produce all records, including email and instant messages concerning it. The firm refused to produce
emails private email accounts used by the branch office and delegated the production of documents initially to the branch office. Eventually the firm produced some hard copies of emails to the SEC. It was never able to confirm that all the records had been preserved.

The Commission found the firm violated SEC rules by failing to promptly produce required records. "[A] broker-dealer is 'obligated to conduct its business in a manner that allow[s] it to furnish promptly required books and records upon demand from the Commission ...."

The firm argued that the branch employees were independent contractors. The Commission noted that this did not excuse the firm's failure to maintain required records. "Under the Exchange Act ... the broker-dealer has the primary responsibility for its business records." Further, the firm is liable under respondeat superior for the misconduct of its employees, here the destruction of branch office computer records.