PAGES/LINE
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TOPIC
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SUMMARY
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1:10-1:11
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Location
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233 Broadway, Atlanta, Georgia
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2:3-2:20
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Appearances
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Debra Seidler,
Securities and Exchange Commission
Brian Nash, Securities and Exchange Commission
Morgan Crenshaw, Crenshaw & Looter, LLP-
Attorney for defendant
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4:6-7:20
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Witness’
name
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Examination
by Ms. Seidler
Witness is Thomas Gilchrist. Witness has reviewed
Exhibit 1 and Exhibit 2 prior to this hearing. He testified before a grand
jury for two days in 1999.
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7:21-9:17
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Admonitions
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Admonitions were reviewed.
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9:18-13:19
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Witness’
preparation
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Witness told two of his co-workers that he would
be out of the office to give testimony today. Witness did not discuss the
content of his expected testimony with either of them. He also told Diane
Moore that he was going to testify. He did not discuss the content of his
testimony with Moore. Prior to today, witness reviewed exhibits related to
mutual fund block letters. He reviewed documents related to mutual fund
trades for particular clients. He reviewed his firm’s compliance manuals.
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13:20-16:13
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Professional
background
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Witness has a BA in Business Administration from
Georgia University. He graduated in 1984. He worked with Mutual Fund from
12/1984 to 2/1990. He started in the registration licensing department. He
subsequently worked handling customer complaints and sales practice matters,
responding to various SROs, and handling arbitration matters. He then worked
at Jones McAdams from 3/1990 to 6/1995. He left there due to downsizing. He
started in 8/1995 at French Bank, where he currently works as a Compliance
Analyst. Witness has the following licenses: Series 7, Series 65, Series 63,
Series 24, and Series 8. He has had these licenses since 4/2000 and is not a
member of any professional organization.
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16:14-17
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Exhibit
1
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Exhibit 1
Exhibit 1, Delegation Memos, was marked for
identification.
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16:18-20:1
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Exhibit
1
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This memo is dated 6/1/2002. Witness believes
there was an earlier delegation memo. The prior memo was very similar; this
memo might have one or two items of added supervisory responsibility. The way he does his job on a day to day
basis is fully covered in Exhibit 1. Witness initialed Exhibit 1. Mandler’s, Brown’s and Obert’s
initials are also on the exhibit.
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20:2-25:19
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Handling
of a block letter
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Witness is responsible for reviewing incoming
correspondence that comes to the 500 Elm Drive branch. After reviewing the
correspondence, he initials it, has copies made and forwards it to the proper
person. The originals are kept in the company records. He receives mutual
fund block letters. He initials those letters and talks to the broker about
them. In most cases, he would advise Mandler that
they received a block letter. Depending on how busy he was, he would note on the
block letter that he talked to the broker and advise the client of the
letter. The lack of a notation on the block letter does not mean that he did
not notify the broker and the client. He would advise the client that they
were not permitted to trade in that particular fund.
Examination
by Mr. Nash
When he talked to the broker, he would advise the
broker to advise his client that the client is being blocked. He understood
that the fund itself would block the client from entering orders. He advised
the brokers of that. He understood that the brokers would then stop
submitting orders for the blocked fund.
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25:21-31:22
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Blocking
an account
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Witness does not understand how a fund would block
a trade by a client. French Bank does not have a policy in place to track
mutual fund blocks for clients. Referring to Exhibits 2 & 3: witness’
handwriting is on exhibits 2 & 3. The letters “CMPL” on Exhibit 3
signifies that a copy of the letter would possibly be in the compliance file.
French Bank’s policy is to keep a broker compliance file for each broker. Mandler reviewed Exhibit 3 and directed witness to place
it in the compliance file. Witness DNR the specific conversation with Mandler on the matter. The BIN numbers on Exhibits 2
& 3 are account numbers. The X on Exhibit 3 represents the 500 Elm Drive
branch of French Bank. Witness understands that the mutual fund company would
block a client based on both the account number on the block letter and the
name of the client in the letter. No one at a mutual fund company told him
that they knew the names of clients.
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31:23-35:3
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Phone
call to broker re: block letter
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Referring to Exhibit 2: witness did not
specifically tell Vierro that he was to comply with
the second paragraph of the exhibit. Witness forwarded a copy of the letter
to Vierro. French Bank did not have a procedure to
ensure that mutual fund companies would not be timed by IRS at the 500
branch. Referring to Exhibit 3: witness DNR verbatim the conversation with Vierro regarding his client being advised by National US
Funds that he was blocked from trading. Witness did not discuss with Vierro that he had previously received a block letter
from National US Funds on 12/1/2003. Witness deals with each day’s
correspondence that day. He does not keep records of prior correspondence.
Witness’ call to the broker is a fail-safe mechanism to back up sending the
actual block letter.
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35:4-38:14
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Mail
handling
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All mail that comes to the office comes to
witness’ desk from the mail room. He DNR receiving Exhibit 2, but his
initials on the document indicate he received it. He then would have
routinely forwarded the document to Vierro. Witness
would typically put such mail in an envelope, mark it with the broker’s name
and give it to the mail runner. The mail runner in 12/2003 was Cameron Ochoa
or Eric William. Witness has not heard of any problems where anyone has
complained of mail not being delivered properly.
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38:15-40:23
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Mail
review by witness
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Examination
by Ms. Seidler
Witness reviews all incoming mail to prevent
problems arising with clients or clients’ accounts. He also is responsible
for noting material facts such as address changes in the correspondence. Some
items require followup, such as a client alleging
misuse of an account and complaints on the account. Mutual fund block letters
do not require follow-up. The block letters are communications from the fund
to the broker advising the client of the change in status.
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40:24-46:20
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Review
of account activity
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Examination
by Mr. Nash
Referring to the first sentence of Exhibit 2: The
reference to excessive exchange activity in the listed accounts did not alert
witness to any potential churning problem because the trades were initiated
by the client. Exhibit 2 does not identify the client by name. There was
nothing in Exhibit 2 that would have caused witness to review the accounts.
Upon reviewing Exhibit 2, he would have spoken to a broker to determine what
the client’s objectives were. He would have advised Mandler
of the conversation. His practice then might have included looking up the
name of the client. Witness’ director reviews the account activity monthly.
It was not witness’ general practice to review the account activity prior to
talking about the block letter to the broker or to Mandler.
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46:21-50:10
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Exhibit
2
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Examination
by Ms. Seidler
Referring to Exhibit 2: witness cannot match the
account numbers with the names of clients from memory. At some point he
recalls looking at Naturon. He DNR when he came to
the understanding that the activity in the account was consistent with the
client’s stated objectives. He probably came to the understanding prior to
7/2003. Referring to Exhibit 2, first paragraph: Tyra
Rivera, the author of Exhibit 2, spoke to Vierro’s
assistant. French Bank does not have a policy that precludes a broker from
speaking with the mutual fund company.
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50:11-53:19
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Inter-office
mail
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Inter-office mail, from other branches, would only
come to witness’ office from Seattle, which is their hub. Witness opens
inter-office mail and reviews what is to his attention and forwards other
inter-office mail to Mandler. Inter-office mail
only comes to those two persons. Witness DNR reviewing inter-office block
letters.
Examination
by Mr. Nash
Witness reviews all inter-office mail that comes
to his branch. He DNR any letters from Cushing to 500 Elm Drive that
concerned block letters.
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53:20-59:8
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Compliance
Department
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Examination
by Ms. Seidler
The Seattle office has Compliance, Legal and
Operations. Christine Erickson Christine Erickson is the contact person in
the Seattle Compliance office. The Compliance office exists to ensure that
the branch is in compliance with the rules and policies of French Bank and to
ensure compliance with the Exchange and the various SROs.
Examination
by Mr. Crenshaw
Witness has not worked in the Compliance office.
The Compliance Department does an annual audit of 500 Elm Drive. If they find
a deficiency, it must be rectified.
Examination
by Ms. Seidler
Witness has communications with the Compliance
Department besides the audits. He might call them for guidance. He always
follows their advice.
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59:9-63:12
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Specific
mutual fund block
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Witness DNR an IR getting involved in mutual fund
block letters. He recalls the 500 Elm Drive branch being blocked by a
specific mutual fund. He DNR the fund. That block was communicated to him by
the Seattle office. He DNR who he spoke to; it was sometime in 2003. It was
blocked with regard to market timing. The conversation was in regard to a
potential problem. Witness alerted Mandler to the
problem. He DNR any other conversations about that issue.
Examination
by Mr. Nash
Witness DNK what Mandler
did with the information that witness gave him about the block. Mandler told witness that he would follow up on the
information. Witness DNR if he ever knew who the client was who was the
subject of that block letter.
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63:13-70:15
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French
Bank policies and procedures re: block letters
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Examination
by Ms. Seidler
Mutual funds send out block letters because market
timing and in and out exchanges are not practices that they want to promote.
French Bank had no policies in place that precluded clients from doing market
timing. French Bank did not have a policy in place to stop a client who had
been blocked in one account from trading the same fund in another account.
When he received a block letter he would speak to the client advisor and ask
him to inform his client of the block.
Examination
by Mr. Nash
Advising the client advisor has been the practice
of witness since starting with French Bank. Mandler
did not disapprove of the practice. The purpose of the contact with the
client advisor is to inform him that the fund disapproves of a practice his
client is engaged in, and the fund will block that activity in the future.
Witness DNK of any procedure in place to ensure that the broker will inform
the client of the block letter and future action of the fund with respect to
trades. Witness DNK of any follow up to the notification of the broker of the
block letter.
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70:16-74:25
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Block
letters received at French Bank
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Examination
by Ms. Seidler
Witness DNR any specific conversations with Vierro regarding block letters directed to him. He DNR
any specific conversations regarding mutual fund block letters received for
Chase Werner. Witness DNR any specific conversation with Henry Bryce
regarding block letters. He recalls having a specific conversation with Debra
Silverman. He DNR any specific conversations with regard to block letters
with Brown or Mandler. Referring to Exhibit 6: On
the days when witness was in the office at 500 Elm Drive he would have
reviewed the block letters that are part of Exhibit 6 as they came in. The
volume of letters that came in over this 13-month period did not concern
witness.
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75:1-80:7
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Mutual
fund trades
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Witness is not aware that Harbinger and Vierro were keeping track of mutual fund blocks in
accounts managed by Alexis Winter. He is not aware that Harbinger and Vierro were keeping track of mutual fund blocks in
accounts managed by John Quan. Witness was aware
that Quan’s accounts were market timing mutual
funds along the lines of Naturon.
Examination
by Mr. Nash
Prior to the inquiry by the state attorney
general, witness knew that there was some relationship between Quan and Naturon. A wire in
8/2003 led witness to conclude that Quan and Naturon were linked.
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80:8-83:6
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4
p.m. cutoff time
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Prior to 9/2003, witness was not aware that Vierro and/or Harbinger were entering trades for Winter
after 4 p.m. Prior to 9/2003, witness was aware that Vierro
and Harbinger had access to the Cushing mainframe order entry system. LPTP is
distinct from Net X Pro. Net X orders go to the fund and are executed.
Examination
by Ms. Seidler
Prior to 9/2003, Vierro
and Harbinger had access to LPTP. Witness DNR who authorized their access to
LPTP. Net X Pro and LPTP both shut down at 4 p.m.
Examination
by Mr. Nash
The manager’s approval station locked out new
orders at 4 p.m. Orders must meet specific criteria and a manager’s approval
with respect to Net X Pro. There was no management review of orders placed on
LPTP.
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83:7-89:9
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Loran’s
access to LPTP
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Examination
by Ms. Seidler
Witness DNR how he learned that Vierro and Harbinger had access to the LPTP system. He
had a discussion with Loran, where she expressed her frustration with the Net
X Pro system. Loran said she was going to talk to management about this. This
conversation was shortly after the Cushing conversion. When he later
overheard Loran’s comment about the LPTP system, he knew that he problem was
solved.
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89:10-94:21
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Management
review of accounts
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All email communications from sales assistants or
brokers are reviewed by management. Some of the e-mails are kept on file as
mandated by the SROs and New York Stock Exchange. Mandler
does the reviews. Only a percentage of the e-mails are reviewed. All members
of the management team are empowered to sign off on new account forms. In the
case of multiple accounts, they would ask the broker about the reason for
multiple accounts. Witness looks for a legitimate business purpose for
multiple accounts. In foreign accounts the procedures are more rigorous for
opening multiple new accounts. The Compliance Department reviews new foreign
accounts.
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94:22-95:20
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Trading
by employees
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Witness DNR if Quan’s
accounts were discretionary accounts. He can identify a discretionary account
of a non-employee by looking at the number. Quan’s
accounts needed approval by management prior to execution of trades in
equities and options, because he is an employee. Mutual funds are not
included in that restriction. There is a system in place to review
transaction after the fact.
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95:21-97:4
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French
Bank’s market timing policy
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Examination
by Ms. Seidler
French Bank’s market timing policy prior to 9/2003
was that any client engaging in at least four round trips with regard to
mutual funds would be classified as a market timing. French Bank would
communicate to the client that the client was responsible for any fees or
charges arising from a fund not accepting orders under this condition. Mandler met with Derler Capital
regarding market timing. After that meeting Derler
Capital was brought on board as a client. There was no policy in place at
French Bank to track market timing other than the daily activity report and
the mutual fund order log.
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