James B. Chase

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 47476 / March 10, 2003

Admin. Proc. File No. 3-10586

ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION

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

ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against James B. Chase, and the Association's assessment of costs, be, and they hereby are, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

¹ NASD Conduct Rule 2310 requires that, in making securitiestransaction recommendations to their customers, registered representatives have reasonable grounds for believing that the recommendations are suitable for their customers based upon the facts, if any, disclosed by their customers as to their other security holdings and their financial situation and needs. Registered representatives are required before effecting any transactions for their customers to make reasonable efforts to obtain information concerning their customer's financial status, tax status, investment objectives, and such other information used or considered to be reasonable by the registered representatives in making recommendations to their customers.

Conduct Rule 2110 requires that registered representatives "observe high standards of commercial honor and just and equitable principles of trade."

² The NASD also assessed costs.

³ Chase became associated with Collopy on May 30, 1995, after leaving Megerian, Inc., another NASD member firm. Prior to his association with Megerian, Chase was associated with Robert W. Baird & Co., also an NASD member firm.

⁴ Since leaving the industry, Chase has been a consultant for the Female Health Company, trading in the stock of which is the subject of this proceeding.

⁵ This is the approximate net amount she received, after subtracting attorney's fees.

⁶ Horvath transferred her account from Megerian to Collopy in June 1995.

⁷ Chase provided the only testimony in the proceeding. According to Horvath's tax returns, her adjusted gross income for 1994 was $6,900.

⁸ The amounts varied from month to month averaging approximately $4,500 per month, until November 1995. Late in that month Horvath withdrew approximately $125,000, which Chase claims she used to purchase a new condominium with her mother. According to Chase, he sent Horvath's lawyer and accountant duplicates of account statements and confirmation forms from her account. Chase also testified that Horvath's mother and another family acquaintance continued to be involved in Horvath's financial affairs.

⁹ Chase prepared a new account form dated March 25, 1996 reflecting this primary investment objective change. On the form, Chase inflated Horvath's net worth to $800,000, of which he listed $500,000 as liquid assets, although her brokerage account statements for February and March 1996 list her total account assets at $308,000 and $309,000, respectively. Chase never explained how he arrived at the $500,000 liquid assets figure. He claimed that the $300,000 of non-liquid assets represented the value of a condominium, which Horvath had purchased three months earlier for $250,000.

¹⁰ The new account form is in Chase's handwriting, and there is no support in the record independent of this document that Horvath's investment objectives were changed. There also is no evidence, other than Chase's testimony, that Horvath ever agreed to the information contained in the new account form.

¹¹ At approximately this same time, Chase agreed to serve as a placement agent for FHC. Under the terms of his agreement with FHC, Chase would receive compensation in the form of warrants to purchase FHC shares at a discount if he could arrange a certain number of private placements with institutional investors. There is no evidence that Chase sold any FHC stock out of the inventory that he controlled to Horvath, or that he received any compensation from FHC for selling shares to Horvath.

¹² In fact, FHC's 1996 Annual report showed operating lossesfor FHC and its predecessor, WPC, going back to 1992. WPC's 1995 Annual Report showed the same result going back to 1991, and declared that since 1988, its operating results had been significantly impacted by expenses related to the female condom product.

¹³ Chase claims that one reason for the margin calls was that, after opening the margin account, Horvath continued to withdraw significant amounts from her account. The record does not support this claim. In our review, we found no withdrawals by Horvath from the account after April 1996.

¹⁴ To make this finding, the Hearing Panel considered an affidavit prepared by Horvath.

¹⁵ See Stephen Thorlief Rangen,52 S.E.C. 1304, 1308 (1997) (discussing suitability in the application of the New York Stock Exchange, Inc. rule governing just and equitable principles of trade). In Rangen, the respondent recommended and effected transactions so that, in one instance, one customer's entire net worth was invested in a single stock, and in another, 80 percent of the equity in a customer's account was concentrated in one stock. We found that, "by concentrating so much of their equity in particular securities, [the registered representative] increased the risk of loss for these individuals beyond what is consistent with the objective of safe, non-speculative investing." Id. In Gordon Scott Venters, 51 S.E.C. 292, 293 (1993), we found respondent violated the NASD's suitability rule where the respondent recommended that a 75 year-old widow with no more than $35,000 net worth invest $2,300 in a company that was losing money, had never paid a dividend, and whose prospects were totally speculative. In making our finding, we noted that the registered representative had recommended that the customer invest "an amount of money that was substantial in relation to her limited resources . . ., [and that] [s]uch an investment in [such] a company . . . would be suitable only for an individual who could withstand the loss of the entire principal amount." Id. at 293-94.

¹⁶ See, e.g., Charles W. Eye, 50 S.E.C. 655, 658 (1991) (use of margin in account of investor with limited means and needfor income was unsuitable).

¹⁷ See Rangen, 52 S.E.C. at 1308.

¹⁸ Id. at 1307-08.

¹⁹ See F.J. Kaufman, 50 S.E.C. 164, 170 n.25 (1989) ("The amount of liquid assets is particularly relevant to margin purchasers . . . because, if a margin purchaser does not have sufficient liquid assets to meet a margin call, the security will be sold to meet the margin call, usually resulting in a loss to the customer.").

²⁰ For example, Horvath paid $9,500 in interest charges in 1996.

²¹ 47 S.E.C. 985 (1983) (investor was a 75-year old widow).

²² We note that in Rangen, although three of the investors were in their 70s and retired, the fourth investor was 29 years old with a moderate income. The Commission found that this person was an unsophisticated investor who had no desire to risk his principal. 52 S.E.C. at 1307.

²³ See John M. Reynolds, 50 S.E.C. 805, 809 (1992) (regardless of whether customer wanted to engage in aggressive and speculative trading, representative was obligated to abstain from making recommendations that were inconsistent with the customer's financial situation), amended on other grounds, Exchange Act Rel. No. 30036A (Feb. 25, 1992), 50 SEC Docket 1839. See also Venters, 51 S.E.C. at 294-95 (notwithstanding client's interest in investing in speculative securities, broker had duty to refrain from recommending such investments when he learned about his customer's age and financial situation); F.J. Kaufman, 50 S.E.C. at 168 ("The suitability rule . . . requires a broker to make a customer-specific determination of suitability and to tailor his recommendations to the customer's financial profile and investment objectives").

²⁴ See, Patrick G. Keel, 51 S.E.C. 282, 284 (1993).

²⁵ See Peter C. Bucchieri, 52 S.E.C. 800, 804 n.9 (1996) (noting that customer's graduate degree from Harvard did not make him a sophisticated investor).

²⁶ See NASD Conduct Rule 2310(b). Chase argues that the NASD Hearing Panel improperly considered an affidavit prepared by Horvath in making its findings. Horvath's affidavit states that she did not change her investment objectives. Chase asks us to rule that the affidavit was not properly admitted, and to find that Horvath did, indeed, change her objectives. The Hearing Panel's decision is not before us on review; rather it is the NAC decision we consider here. The NAC specifically found that the affidavit was "unnecessary to [its] findings," because, even if Horvath had changed her objectives, the NAC concluded that Chase's recommendations were still unsuitable. Because of the NAC's finding, we did not consider the affidavit in our review of its decision.

²⁷ 50 S.E.C. at 659. Chase's contention that concentrating in one or two speculative stocks can be a sound investment strategy is beside the point. For the reasons stated in the text, such a strategy was not sound for Horvath. Cf. Larry Ira Klein, 52 S.E.C. 1030, 1038 n.30 (1996) (respondent could not rely on general approval by his supervisors ofcertain bonds as a substitute for an individual determination that any of the bonds were suitable for specific clients).

²⁸ A violation of Conduct Rule 2310 is also a violation of Conduct Rule 2110, which requires a member, in the conduct of his business, to observe high standards of commercial honor and just and equitable principles of trade. See Clinton Hugh Holland, Jr., 52 S.E.C. 562, 566 n.20 (1995), aff'd, 105 F.3d 665 (9th Cir. 1997) (Table).

²⁹ 15 U.S.C. § 78s(e)(2).

³⁰ Id. Chase does not claim, and the record does not show, that the NASD's action imposed an undue burden on competition.

³¹ NASD Sanctions Guidelines (1998 ed.) at 83.

³² In 1991, the state of Wisconsin censured Chase for making unsuitable recommendations to a Wisconsin resident to purchase securities in an oil and gas company that filed for bankruptcy in 1989. In 1995, Chase was censured by the New York Stock Exchange for, among other things, recommending unsuitable transactions to a customer.

³³ We have considered all of the contentions advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.