Richard Cody, formerly an RR with Leerink Swann & Co., challenged FINRA's one-year suspension and $36,000 fine that were based on FINRA' allegations Mr. Cody:  (i) made unsuitable recommendations;  (ii) sent misleading documents sent to customers;  (iii) failed to update his Form U4.  Appeal was filed 6/9/10;  SEC's ruling was released 5/27/11.   Below are pertinent facts and findings in the case, as determined at the SEC hearing.

FINRA Findings, Cody's Appeal.   Richard Cody, formerly an RR associated with Leerink Swann & Co. appeals from FINRA disciplinary action.  Cody began working in the securities industry in 1996.  After working for several other firms, he was associated with Leerink from December 2001 through May 2005.  Beginning in May 2005, Cody was associated with GunnAllen Financial, which then was a broker-dealer and RIA.  The conduct at issue in this case began in 2003.   FINRA found that Cody allegedly:  (i) recommended unsuitable trading in several customer accounts;  (ii) sent customers misleading account summaries and information;  (iii) failed to timely update his Form U4 to disclose 2 settlement agreements.

Cody Recommends Credit Suisse Securities.   On 2/6/03, less than a week after one customer opened an account, Cody invested $86,500, or approximately 23% of Mr. Bates' initial contribution, in CS First Boston Mortgage Securities Corp. IndyMac Manufactured Housing Passthrus ("CS Securities").  Weeks later, on 2/25 and 2/27, Cody made several purchases of the these same securities for a second customer, investing $31,725 (~13%) of the account's $243,000 market value.

Originally issued in 1997 with a stated maturity of February 2028, the CS Securities were collateralized by "[f]ixed rate manufactured housing installment sales contracts and installment loan agreements." The securities were divided into 11 classes, or tranches.  The tranche that Cody recommended was 8th in order of priority, a $11.9 million mezzanine tranche which was subordinated to approximately $117.8 million in the senior tranches.

From the dates of these purchases through early 2004, the CS Securities were repeatedly downgraded, with the Fitch rating falling from A to CCC.  The asking price also sharply declined from around $104 in February 2003 to around $41 by mid-February 2004.  In February 2004, Cody began selling the Customers' holdings.  He sold Customer 2's holdings in February and April 2004- realizing $17K in losses. or about 55% of their initial investment.  He sold Customer 1's holdings in February, April, and May 2004, realizing $57K in losses, or about 66% of the customer's initial investment.  Cody did not consult with either customer before executing these sales.

At the hearing, Cody admitted that he did not really understand the CS Securities when he recommended them to the customers, and conceded that he didn't know or explain to the customers which tranche he was recommending, what kind of assets collateralized the securities, or other factors that would affect the risks of his recommendation.  Although Cody testified that he relied on the rating, he did not know that the securities had been downgraded by Fitch 4 months before his recommendations.

Cody Recommends Ahold, Calpine, and Royal Caribbean Bonds for Customer 1.   Later in 2003, Cody purchased 3 non-investment grade securities for the customer's account. 

Frequent Trading.   From February 2003 through May 2004, Cody effected 108 trades in Customer 1's account.  Although Leerink statements reported that the account had a market value of less than $475,000 during each month of this period, Cody made 69 purchases totaling approximately $1.7 million. 

From June 2003 through May 2004, Cody effected 140 trades in Customer 2's IRA - 84 purchases totaled more than $1.3 million during this period although the average market value reported for Ms. DeSimone's account approximated $421,000.  Cody generally sold other investments from the same account to fund these purchases.  Only 3 fixed-income holdings were held for the entire period; these holdings had a total market value of $48,130 as of 5/31/04, representing 12% of the $412,929 market value reflected on the corresponding Leerink statement.  Many of the trades involved frequent purchases and sales of the same or similar securities in quick succession.

Control of Trading in Both Customer Accounts.   The customers had not signed documents giving Cody formal discretionary authority, but they allowed Cody to initiate and execute trades in their accounts before consulting them.

Account Spreadsheets and Activity Sheets.   From 2003 until his departure from Leerink in May 2005, Cody created and sent 24 spreadsheets to Customer 2 and 22 spreadsheets to Customer 1.  Cody testified that he used the monthly statements to compile the spreadsheets.  He told the Customers that these summaries, which he referred to as ladders or bond ladders, were meant to simplify the review of their accounts.

Cody's Form U4.   After leaving Leerink in May 2005, the both customers spoke with Leerink managers about their accounts - each raised concerns about Cody's recommendation of the CS Securities.  They also claimed that Cody had managed their accounts to maximize commissions, and alleged that the spreadsheets were misleading.  Cody entered into settlement agreements with the customers in August and September 2005, agreeing to pay a total of $76,000 to both.  Although Cody was associated with GunnAllen at that time, he waited until September 2007 to amend his Form U4 for these settlements.

Conclusion.   The SEC sustained FINRA's findings of violations and the sanctions imposed thereon. Cody lost his last and, hopefully, final appeal.   [SEC '34 Act Release 64565, 5/27/11]