ADMINISTRATIVE PROCEEDING BEFORE THE SECURITIES COMMISSIONER OF MARYLAND IN THE MATTER OF: * CASE NO. 2005-0320
GEORGE GRAFAS *
* * *
CONSENT ORDER WHEREAS, the Securities Division of the Office of the Attorney General (the "Division") initiated an investigation into the activities of George Grafas (Respondent); and WHEREAS, the Maryland Securities Commissioner (the "Commissioner") has found that grounds exist to allege that Respondent violated the Maryland Securities Act, contained at Md. Code Ann., Corps. and a*s'ns, 11-101 et seq. (2007 Repl. Vol.) (the "Securities Act"), by engaging in acts or practices constituting violations of the Securities Act; and WHEREAS, before the holding of a hearing, without trial or final adjudication of any issue of fact or law, and prior to the issuance of a final order in this proceeding, the Securities Commissioner and Respondent have reached an agreement whereby Respondent, without admitting or denying the Statement of Facts and Findings of Fact and Conclusions of Law contained herein, consents to the terms of this Order:
I. [continued below]....
1. The Securities Commissioner has jurisdiction in this proceeding pursuant to Section 11-701 of the Securities Act.
2. Respondent is a New York resident and at all times relevant to the facts contained
in this Order worked out of the State of New York.
3. Over the past 13 years, Mr. Grafas has been employed as a broker-dealer agent at nine different brokerage firms, including Whitaker Securities LLC (Whitaker Securities), Harrison Securities, Inc. (Harrison Securities) and First Allied Securities Inc. (First Allied).
4. From April 19, 2006 to October 19, 2007, Mr. Grafas was registered in Maryland as a broker-dealer agent affiliated with Whitaker Securities. During that same period of time, Mr. Grafas was registered with NASD, Inc. (NASD) as a general securities representative.
III. STATEMENT OF FACTS
5. John Holschuh, a Maryland resident, is/was a self-employed home builder. His wife, Jane, is/was employed as an administrative assistant. The Holschuhs held their jobs since before they began dealing with Mr. Grafas.
6. Although Mr. Holschuh invested his savings over the years, he was not trained in financial matters, nor was his wife.
7. In January 2001, Mr. Holschuh opened two accounts at First Allied after receiving a cold call solicitation. At that time, Mr. Holschuhs investment objectives on both accounts were listed as 1 growth, 2 trading, and 3 speculation. Mr. Holschuhs investment experience was listed as 25 years equities, and 10 years mutual funds. Mr. Holschuhs income was listed as $50,000 and $60,000, respectively, his net worth as $900,000 and his liquid net worth as $50,000.
8. First Allied account no. 766-34075-13 did not experience any significant trading activity.
9. During the first year that account no. 654-40401-13 was handled by Mr. Holschuhs first First Allied broker, there was no significant trading activity. Mr. Holschuh deposited approximately $25,000 into the account and by the end of January 2002 the account was worth approximately $20,000. The account had made some use of margin, but it was not significant.
10. Around the beginning of January 2002, Mr. Holschuh was contacted by stockbroker George Grafas, who informed Mr. Holschuh that he was the new broker assigned to Mr. Holschuhs account.
11. During Mr. Grafas initial contacts with Mr. Holschuh, he inquired into whether he or his wife maintained other brokerage accounts and the performance of those accounts. When Mr. Grafas learned that the Holschuhs had brokerage accounts at Merrill Lynch and Smith Barney that were depreciating in value, he said he could achieve a better rate of return for the Holschuhs.
12. Mr. Grafas urged Mr. Holschuh to transfer the Merrill Lynch and Smith Barney brokerage accounts to First Allied so that he could invest those monies on the Holschuhs behalf. Mr. Holschuh believed that Mr. Grafas had his familys best interests in mind, and he agreed to transfer two outside accounts over to First Allied (for a total of four First Allied accounts).
13. On April 22, 2002, Mr. Grafas faxed Mr. Holschuh a breakdown of how your portfolios will be allocated. Mr. Grafas listed four portfolios. According to Mr. Grafas, three portfolios would be relatively conservatively invested in corporate preferred stock, real estate investment trusts (REITs) and bond funds, and a fourth portfolio invested with $85,000 would be more aggressively traded in short or long stocks.
14. In response, Mr. Holschuh contacted Mr. Grafas by fax dated April 24, 2002, because Mr. Holschuh was concerned about the risk relative to the REITs, the preferred stocks and the bond funds shown in the portfolios. According to Mr. Holschuh, Mr. Grafas assured Mr. Holschuh that the risk would be acceptable and consistent with the Holschuhs objectives.
15. Mr. Grafas directed Mr. and Mrs. Holschuh to sign some First Allied new account forms and get the forms back to him. According to Mr. Holschuh, the forms were not completely filled in, however, he signed the blank forms in January 2002 and returned them to Mr. Grafas.
16. As to First Allied account nos. 654-41732-11 (in the Holschuhs name) and 654- 91565-18 (an IRA account in Mr. Holschuhs name), Mr. Holschuh later learned that the new account forms reflected that Mr. Holschuh had 25 years experience in annuities, 20 years experience in options, and 20 years experience in trading on margin. According to Mr.
Holschuh, as to account nos. 654-40401-13 and 654-41732-18, the new account forms inaccurately reflected that Mr. Holschuhs investment objectives were (1) speculation and (2) trading. See Ex. 6, copy of new account form for account no. 654-40401-13.
17. According to Mr. Holschuh, in Mr. Holschuhs IRA account, no. 654-91565-18, the new account forms inaccurately reflected that Mr. Holschuhs investment objectives were (1) trading, (2) speculation, (3) growth and (4) income.
18. Once the Holschuhs outside accounts at Smith Barney and Merrill Lynch were 5 transferred to First Allied in April 2002, all of the investments were liquidated.
19. A few months later, Mr. Grafas contacted Mr. Holschuh to advise that he was leaving First Allied to join a new firm, Harrison Securities. Mr. Grafas arranged, therefore, for the Holschuhs First Allied accounts to be transferred to Harrison Securities. Just two months after being contacted by Mr. Grafas, in June 2002, Mr. Grafas opened four Harrison Securities accounts for the Holschuhs, funded with their First Allied assets.
20. The Harrison Securities new account forms for the Holschuhs individual accounts reflected that Mr. and Mrs. Holschuh each had an annual income of $100,000, which was twice as high as the First Allied new account form.
21. The Holschuhs Harrison Securities accounts, Nos. LWW-802931-U3 and LWW- 802922-U3, were set up as IRA accounts, however, according to Mr. Holschuh, the forms inaccurately reflected investment objectives of (1) speculation and (2) growth.
22. Each of the Harrison Securities new account forms indicated a risk tolerance of moderate with investment objectives of (1) speculation and (2) growth. Id. According to Mr. Holschuh, however, he agreed only to commit $85,000 in funds to higher-risk transactions.
23. As a result of the transfers from the outside accounts, Mr. Holschuhs Harrison Securities account, No. LWW-059189-U3, was credited $238,250.93. According to Mr. Holschuh, Mr. Grafas was to invest this account conservatively in preferred stocks, REITS and bond funds, however up to $85,000 of the monies in that account would be invested more aggressively.
24. The Holschuhs joint account, No. LWW-059171-U3, was credited $74,149.86. Id. According to Mr. Holschuh, his understanding was that this account, along with the 6 Holschuhs IRA accounts, would be invested more conservatively.
25. Before the Holschuhs Harrison Securities accounts became active, Mr. Holschuh faxed a memo over to Mr. Grafas regarding the more aggressive trading contemplated just within his account and limited to $85,000 in securities. Mr. Holschuh explained that he had gone through the short trading for his account and for Janes account at First Allied, and advised him that he was providing him with that history until my account [at Harrison Securities] is up and running (emphasis added).
26. Almost immediately, Mr. Grafas began actively trading both account nos. LWW-059189-U3 and No. LWW-059171-U3, purchasing securities short.
27. By November 30, 2002, after only six months, Account Nos. LWW-059189-U3 and LWW-059171-U3 were down to less than half of what they were worth when the accounts were first opened. The accounts had balances of $88,769.68 and $21,815.67, respectively.
28. The account losses in both LWW-059171-U3 and LWW-0591189-U3 were attributable primarily to the short trading in the accounts, and having to cover the shorted stocks. Despite expressing concerns to Mr. Grafas over his trading activities, particularly the short trading, the losses in the Holschuhs accounts continued to mount.
29. The Holschuhs experienced significant losses in their Harrison Securities accounts.
30. With respect to Mr. Holschuhs account, No. LWW-059189-U3, trading in the account caused losses equal to more than $250,000. The turnover ratio for the account, which was opened for around one year, approximated 36.
31. With respect to the Holschuhs joint account, No. LWW-059171-U3, trading in the account caused losses equal to more than $90,000. The turnover ratio for the account, whichwas opened for around one year, approximated 48.
32. In February 2005, the Holschuhs filed arbitration claims against Harrison Securities, Mr. Grafas and others, alleging fraud, breach of contract, negligence, and violations of the Securities Act.
33. In April 2006, Mr. Grafas settled with the Holschuhs, paying them $25,000 in exchange for the dismissal of the NASD claims against him. The Holschuhs signed a settlement agreement releasing Mr. Grafas from the NASD arbitration action they filed.
34. While with Whitaker Securities, Mr. Grafas filed Form U-4 amendments with CRD dated August 22, 2006, September 6, 2006 and April 27, 2007 (the Form U-4 Amendments). Well before each of those dates, Mr. Grafas had settled the Holschuhs arbitration against him. In each of the Form U-4 Amendments, however, Mr. Grafas responded with information as to the Holschuhs arbitration only in response to Item 14I(1)(a), which inquires as to whether the registrant has ever been named as a respondent or defendant in a consumer-initiated arbitration or civil litigation which is still pending. He did not respond affirmatively Item 14I(1)c) or 14I(2), which require a response if there was a settlement in the arbitration or litigation for more than $10,000.
35. In May or June 2007, the Securities Division contacted CRD regarding the disclosures made by Mr. Grafas with respect to the Holschuh arbitration. The Securities Division advised personnel at the CRD that the Holschuhs confirmed that they settled the arbitration as to Mr. Grafas and that Mr. Grafas paid the Holschuhs $25,000 pursuant to a settlement agreement.
36. On or about June 19, 2007, Mr. Grafas filed a Form U-4 amendment with CRD regarding the Holschuh arbitration, indicating that on or about April 28, 2006 [the Holschuhs] . . . filed with the NASD . . . a notice of dismissal of their claims against George Grafas and that he was not part of a settlement and did not contribute to a settlement directly or indirectly.
IV. FINDINGS OF FACT AND CONCLUSIONS OF LAW
37. In connection with the facts described in the Statement Of Facts contained herein, incorporated herein by reference, Respondent engaged in conduct which may give rise to grounds for revocation under Section 11-412(a)(7) of the Securities Act, and, furthermore, in violation of Section 11-411(d) of the Securities Act, Respondent failed to update his Form U-4 with Whittaker Securities in a timely manner to reflect the $25,000 settlement with the Holschuhs.
V. CONSENT TO CEASE AND DESIST AND OTHER RELIEF
38. NOW, THEREFORE, IT IS HEREBY ORDERED, and Respondent expressly consents and agrees that:
a. Respondent is assessed a $25,000 fine, which fine is hereby waived in light of the substance of Respondents sworn-to financial statement dated November 7, 2008, filed with the Securities Division.
b. Respondent shall cease and desist from engaging in activities in violation of the Securities Act.
c. Respondent, on a permanent basis, shall not apply or reapply for broker-dealer or broker-dealer agent or investment adviser or investment adviser representative registration in Maryland, nor shall Respondent engage in activities requiring such registration in this State, nor shall Respondent engage in any activities requiring registration with the Securities Division in any capacity or in any activities requiring a notice filing with the Securities Division.
d. Respondent shall in all future activities in Maryland comply with the Securities Act and related regulations.
VI. SCOPE OF SETTLEMENT
39. This Consent Order relates only to the Commissioner and Respondent. This Consent Order does not waive or relinquish the Commissioners right to take any action against any other persons or company.
VII. JURISDICTION RETAINED
40. Jurisdiction shall be retained by the Securities Commissioner for such further orders and directions as may be necessary or appropriate for the construction or enforcement of the Consent Order.
41. If Respondent fails to comply with any term of this Consent Order, the Commissioner may institute administrative or judicial proceedings against Respondent to seek to enforce this Consent Order, and may take any other action authorized under the Securities Act or under any other applicable law, including the issuance of fines or penalties as provided by the Securities Act. In any such proceeding in which, after an opportunity for a hearing, the Commissioner or the court finds that Respondent has violated this Consent Order or made any material misrepresentations in the financial statement referred to herein, the Division may also seek other sanctions for the violations that initiated this matter. For the purpose of determining those sanctions, the Statement of Facts and violations of the Securities Act set forth in this Consent Order shall be deemed admitted, and may be introduced into evidence against Respondent.
42. In the event that judicial intervention in this matter is sought by the Securities Commissioner or Respondent, subject matter jurisdiction will lie in the Circuit Court for Baltimore City pursuant to 11-702 of the Securities Act. Respondent agrees that that Court will have personal jurisdiction over Respondent, and that venue will be properly in that Court.
43. The terms of this Consent Order may only be vacated or modified by a subsequent order issued by the Commissioner.
DATE OF THIS ORDER: SO ORDERED:
Commissioners Signature is December 23, 2008 on File with Original Document Melanie Senter Lubin Securities Commissioner
November 13, 2008 __________/s/______________________
On this day of , 2008, personally appeared George Grafas, signer of the foregoing Consent Order, who did duly acknowledge his signature to be his free act and deed.
My Commission Expires: