Sunday, May 15, 2011
The SEC recently sustained NYSE disciplinary action against Philip L. Spartis and Amy J. Elias, former registered representatives of Salomon Smith Barney, Inc., and sustained the censures NYSE imposed against Spartis and Elias for misleading marketing materials sent to employees of Worldcom.
During the period from 1998 to 2001, according to the Commission, Spartis and Elias provided assistance to their customers in the exercise of employee stock options granted to them by WorldCom. In so doing, Spartis and Elias distributed a document, titled the "Exercise & Hold vs Exercise & Sell Analysis," that encouraged customers to exercise their WorldCom stock options and hold the resulting stock for at least a year, rather than exercising their options and immediately selling the stock in the market. The document further assumed an ever-increasing appreciation in WorldCom's stock price, which was consistent with Smith Barney's then-telecommunications analyst Jack Grubman's projections, and encouraged customers, as part of the holding strategy, to use margin loans to fund the transactions. Subsequently, however, the predicted stock price increases "never materialized," producing heavy customer losses.
The Commission agreed with the NYSE that the document was materially misleading, under NYSE's public communications rule, by "'present[ing] an unduly optimistic picture of the potential gains' that would result under the . . . hold[ing] strategy and by failing to include any downside risk analysis." According to the Commission, it was particularly "troubled by the omission of information" in the document "regarding the potential adverse consequences of financing these transactions on margin," noting that "transactions effected on margin . . . entail substantial risks." In upholding NYSE's sanction, the Commission stated that Spartis's and Elias's distribution of the one-sided document to their customers "thwarted" "an important policy objective" of "provid[ing] full and fair disclosure" to investors.