David D. Lewis, who held the positions of chairman, chief executive officer, chief compliance officer,  and compliance registered options principal with First Washington Corporation, was suspended from association with all Financial Industry Regulatory Authority (FINRA) members in all capacities for two years and fined $30,000 per an Office of Hearing Officers Settlement containing findings that Lewis’ failure to establish, maintain and enforce adequate supervisory procedures to comply with federal securities laws resulted in substantial customer losses. Department of Enforcement v. Lewis, No. 2011025633201 (Oct. 12, 2015).
According to the Order Accepting Offer of Settlement, from March, 2008 through February, 2011, three of First Washington’s customers engaged in a large number of high-risk options transactions that had resulted in losses of roughly $2,853,924.29. The firm reportedly received nearly $515,596.48 in commissions for the options trades. According to the Order, a substantial portion of the customers’ losses could have been prevented had Lewis established, maintained, and enforced adequate supervisory procedures.
The Order indicated that at least two of the customers had opened options positions which exposed the customers to a risk that was greater than the firm had allowed. The Order stated that the firm received accounts for statement review reports from Pershing, LLC, which signaled for potential review the customers who had been faced with significant losses, or where large amounts of commissions had been charged. Such reports, which Lewis reportedly received, warranted review for qualitatively and quantitatively unsuitable recommendations.
The Order indicated that Lewis had written procedures which were deficient because they did not require any principal to review such reports to determine accounts that needed further review, did not require documentation for actions taken, and did not specify the parameters for warranting an additional review. FINRA further found that the written procedures failed to provide for verification that the customers understood and authorized the transactions, had enough buying power to support their purchases of options, or were not exposed to risks that were greater than the firm authorized.
Lewis also reportedly failed to follow his own procedures which required that he approve and endorse commission reports and trading blotters concerning options trading to evidence review and approval of documents, as well as failing to document the course of action upon review. Lewis was also found by FINRA to have approved an option agreement and approval form for a customer without addressing the customer’s options risk exposure or maximum number of options contracts. The Order stated that in another instance, Lewis had failed to abide by a requirement that limited options transactions for customers with no experience trading options, resulting in customers trading against the firm’s policy.
Other supervisory mishaps, according to the Order, included failures to design written supervisory procedures to ensure sufficient equity in customer accounts when trades were entered into an average price account. Additionally, Lewis failed to enforce firm requirements of having the firm vice-CCO endorse and monitor transactions effected by a Stockbroker who was under heightened supervision as a result of customer complaints. The procedures, which FINRA found inadequate, failed to indicate heightened supervision requirements concerning the type and duration of supervision/review.
The Order additionally indicated that despite Lewis being aware that a Stockbroker, RAP, had received complaints regarding non-compliance with instructions to limit options exposure, Lewis did not have any heightened supervision designed to ensure that customers’ options exposure was limited or designed to prohibit certain type of trades. Consequently, according to the Order, three of the RAP’s customers had sold uncovered calls that created excessive risk exposure for each of them, where the customers’ accounts had not been approved for writing uncovered calls.
As a consequence of the aforementioned supervisory failures, Lewis was found to have violated NASD Conduct Rules 2110, 3010(a), 3010(b)(1), 3010(c)(1), FINRA Rules 2010 and 2360(b)(20)(A). FINRA’s Rule 2360 “duty to supervise” requires that each member that conducts a public customer options account shall ensure that its written supervisory system policies and procedures pursuant to NASD Rules 3010, 3012, and FINRA Rule 3130 adequately address the member’s public customer options business.
Public disclosure records via FINRA’s BrokerCheck reveal that David D. Lewis has been subject to ten disclosures comprised of six tax judgment/liens and three customer complaints in addition to the regulatory event described above. On February 24, 2014, and March 5, 2012, Lewis settled customer disputes for $250,000.00 and $475,000.00 after allegations of Lewis’ failure to supervise a Stockbroker who engaged in unsuitable options trading activity and other improper activities. On February 6, 2013, Lewis settled a customer dispute for $10,000.00 after claimants alleged that First Washington and Lewis allowed excessive options trading without making appropriate disclosure to claimants, along with claims of excessive commissions charged.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each Stockbroker and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esquire, and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.