N E W

Y O R K

S T O C K

E X C H A N G E,

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THE FIRST BOSTON CORPORATION, A MEMBER ORGANIZATION, VIOLATED EXCHANGE RULE 342(b) IN THAT IT FAILED TO PROVIDE FOR APPROPRIATE SUPERVISORY CONTROL TO ASSURE THAT MATERIAL NON-PUBLIC INFORMATION HAS NOT IMPROPERLY DISSEMINATED WITHIN THE FIRM AND ALSO VIOLATED EXCHANGE RULE 342(b) IN THAT IT FAILED TO ESTABLISH AN ADEQUATE SEPARATE SYSTEM OF FOLLOW-UP AND REVIEW TO ASSURE THAT ITS CHINESE WALL AND QUIET RESTRICTED LIST PROCEDURES HERE BEING COMPLIED WITH -- CONSENT TO A CENSURE AND A $60,000 FINE.

EXCHANGE HEARING PANEL DECISION 89-5O

REJECTION OF STIPULATION OF FACTS AND CONSENT TO PENALTY IN THE MATTER OF X.

EXCHANGE HEARING PANEL DECISION 89-51

REJECTION OF STIPULATION OF FACTS AND CONSENT TO PENALTY IN THE MATTER OF Y.

EXCHANGE HEARIHG PANEL DECISION 89-52

June 5, 1989 An Exchange Hearing Panel met to consider a Stipulation of Facts and Consent to Penalty entered into between the Exchange's Division of Enforcement and The First Boston Corporation (the "firm"), a member organization of the Exchange, and between the Division of Enforcement and X, an allied member with the firm, and between the Division of Enforcement and Y, a registered representative with the firm. For the sole purpose of settling this disciplinary proceeding and without admitting or denying any matter referred to herein The First Boston Corporation consents to a finding by the Hearing Panel that it: I. Violated Exchange Rule 342(b) in that it failed to provide for appropriate supervisory control to assure that material non-public information was not improperly disseminated within the firm; Violated Exchange Rule 342(b) in that it failed to establish an adequate separate system of follow-up and review to assure that its Chinese Wall and Quiet Restricted List procedures were being complied with.

For the sole purpose of settling this disciplinary proceeding and without admitting or denying any matter referred to herein, X consents to a finding by the Hearing Panel that he: I. Violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with supervision and control of the activities of those employees related to the business of their employer and compliance with securities laws and regulations with respect to compliance with the Quiet Restricted List procedure by the Equity Department.

For the sole purpose of settling this disciplinary proceeding and without admitting or denying any matter referred to herein, Y consents to a finding by the Hearing Panel that he: I. Engaged in violations of Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with supervision and control of the activities of those employees related to the business of their employer and compliance with securities laws and regulations with respect to (i) compliance with the Quiet Restricted List procedure by the Institutional Block Trading Desk; and (ii) by ordering a trader to sell a security which was included on the Quiet Restricted List.

For the sole purpose of settling these disciplinary proceedings, and without admitting or denying any matter referred to herein, the Division of Enforcement, The First Boston Corporation, X, and Y, stipulate to certain facts, the substance of which follows: The firm was incorporated in Massachusetts on June 27, 1932 and was approved as a member organization of the Exchange on March 29, 1971. 2. The firm is a broker dealer registered with the Securities and Exchange Commission (SEC) providing a broad spectrum of investment banking and financial services on an international basis. As of December 31, 1987, the firm had approximately 12,000 customer accounts and l8 branch offices. X was born on January 6, 1937, and was approved as an allied member on May 26, 1975. He has been employed in the securities industry for about eighteen years. Since November 1984 and at all relevant times, X was the Co-Head of the the firm's Equity Department. X is a Managing Director and member of the firm's Management Committee.

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X has also served as a member of the Exchange Allocation Committee and the Upstairs Trading Committee, and as an elected member of the NASD District Business Conduct Committee of District 12. During his career in the Securities Industry, X has not previously been the subject of any disciplinary action by any regulatory or self regulatory organization. Y was born on July 29, 1945. He was approved as a registered representative by the Exchange in the early 1970's, and has been employed in the securities industry for nineteen years. He is a Managing Director of the firm and, since May 1985, has been the Manager of the firm's Institutional Block Trading Desk ("IBD"). During his career in the Securities Industry, Y has not previously been the subject of any disciplinary action by any regulatory or self regulatory organization.

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Securities and Exchange Commission Civil Injunction 7. On May 5, 1986, the United States District Court for the Southern District of New York, in a civil proceeding, entered a Final Judgment of Permanent Injunction and Other Relief against the firm enjoining the firm from engagin gin transactions, acts, practices and courses of business which constitute or would constitute violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule l0b-5 promulgated thereunder. The firm consented to the entry of the Final Judgment without admitting or denying the allegations contained in the SEC's Complaint for Permanent Injunction and Other Relief ("the Complaint"). The Complaint for Permanent Injunction and Other Relief filed by the SEC alleged that the firm, in breach of a duty of trust and confidence to Z Corporation (hereinafter "Z"), traded in Z's securities for the firm's account on January 30, 1986, while in possession of material non-public information provided by Z concerning a forth-coming announcement of a $1.2 billion addition to Z's property casualty loss reserves, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule lOb-5 promulgated thereunder. The Consent Decree which provided for disgorgement in the amount of $132,138 and the imposition of a civil fine of $264,276 under the Insider Trading Sanctions Act of 1984, included an undertaking requiring the firm to conduct a review of its

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Restricted List and Chinese Wall Procedures and to submit its report of that review to the SEC. Statement of Facts The Acquisition of the Z Material, Non-Public Information ll. On January 20, 1986, the treasurer of Z, a large publicly held Insurance company, contacted one of the firm's Corporate Finance Department Managing Directors for the purpose of arranging a meeting in order to obtain advice regarding the ramifications of a possible increase in the property-casualty loss reserves of Z. On January 21, 1986, Z's Chef Financial Officer met at Z's headquarters with the firm's Corporate Finance Department representatives. At this meeting, the firm representatives were told that Z's Management was considering making a recommendation to its Board of Directors of a $l to $1.5 billion increase in its property casualty loss reserves. The firm's representatives presented the various alternatives available to fund the casualty loss reserves increase. They believed that such action would negatively affect the short term value of Z's securities. Following the January 2l, 1986 meeting, one of the firm's representatives contacted the firm's Legal Department and requested that Z be put on the Quiet Restricted List ("QRL"). This request was made because the firm representatives believed that the subject matter discussed was "market sensitive information."

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January 24, 1986 Z Transaction 15. On January 24, 1986, to facilitate a customer order to sell 50,500 shares of Z convertible preferred stock, the Convertible Preferred Trading Desk purchased 49,900 shares of that security on a proprietary basis and executed the sale of the remaining 600 shares on an agency basis. The Convertible Preferred Desk also transferred a 21,000 share position in Z Common Stock to the Institutional Block Trading Desk. On January 27, 1986, the firm's Legal Department in the course of its review of trading discovered the January 24, 1986, Convertible Preferred Trading Desk position in Z convertible preferred stock and directed that the position not be traded. However, the 21,000 share position in Z

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common stock at the IBD resulted from an internal transfer which was not reflected in the trade runs reviewed by the Legal Department and was not noted. 17. On January 29, 1986, a written analysis presenting the alternatives for the financing of the casualty reserves increase and the probable impact of the increase on the value of Z securities, requested on January 24, 1986, gas delivered by the firm to Z's management. The Chief Financial Officer of Z, on the evening of January 29, 1986, informed the firm that he expected that Z would publicly announce its decision concerning the increase to its casualty loss reserves after a Z Board of Directors special meeting to be held on January 30, 1986.

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Transmittal of the Z Information to the firm's Trading Room 19. On January 30, 1986, before Exchange trading had begun, a firm Corporate Finance Department representative notified a firm Insurance Analyst ("the Insurance Analyst") that Z would make an announcement which could have a negative effect on the value of Z's securities and that he should be prepared to answer questions thereafter concerning the market impact of such announcement. The firm's Corporate Finance Department representative told the Insurance Analyst that he was conveying material information, that Z was included on the QRL and instructing him to advise only his superior of the Z information and that he or his superior should be available to respond to inquiries subsequent to the announcement. The Insurance Analyst contacted his superior, advised him of the Z information and was instructed to convey that information to Y, the Manager of the Institutional Block Trading Desk. Following this conversation, the Insurance Analyst went to the trading floor and spoke to Y at the IBD. During a short conversation, the Insurance Analyst indicated that a significant negative announcement with respect to Z would be forthcoming. Y believed that he was receiving only an analyst's opinion of Z.

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The January 30, 1986 Z Transactions 25. Immediately following or at the same time as the conversation with the Insurance Analyst, Y asked a trader whether he had any exposure in Z Securities. Upon being told that a long position of 21,000 shares existed and without checking the QRL, Y directed the trader to liquidate the position. Acting on Y's instructions, the trader sold the 21,000 share Z position held in the IBD proprietary account at 9:48 a.m. at a price of 69 1/8. Shortly after that conversation, the Insurance Analyst also discussed the Z situation with X in a brief conversation. Upon checking, X was not told specifically of any Z transactions. Shortly thereafter, the trader also purchased 131 Z put options which were sold at a profit the same day. Subsequently, the trader purchased additional Z put options, Z call options and common stock.

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Quiet Restricted List and Chinese Wall Procedures 30. The firm's Chinese Wall procedures prohibited the transmittal of material, non-public information from the Corporate Finance Department to the Equity Trading, Sales, and Research Departments. Except for tender offers (where the applicable SEC rule explicitly dealt with Chinese Wall Procedures), the firm's procedures to prevent trading on the basis of material non-public information focused upon the QRL rather than upon Chinese Wall Procedures. The firm's QRL was a list of limited circulation utilized to restrict the Issuance of Research Reports and trading in proprietary and employee accounts when the firm, as the result of a confidential business relationship, acquired material non-public information. The Legal Department would prepare and distribute the QM which list would be retyped every two weeys if sufficient revisions were necessary. The QRL was distributed to the heads of the Trading and other departments who generally orally inforned their staff of the content thereof on a need to know basis.

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Under the practice in effect at the time, a copy of the QRL and typed corrections were distributed to both X and Y. If changes were required prior to the written revision of the QRL, they would be orally communicated to the recipients of the list. X s secretary would type them onto the QRL and provide a corrected copy to Y. The Legal Department also reviewed the prior day's trading to determine whether a QRL security had been traded. Deficiencies in the firm's Chinese Wall and Quiet Restricted List Procedures Chinese Wall Procedure

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The firm's Chinese Wall Procedures did not prevent the dissemination within the firm of material non-public information emanating from the Corporate Finance Department in that: (i) Information with respect to the Z announcement was conveyed to the Research Department without sufficient safeguards to prevent further dissemination; As a consequence, a member of the Research Department had discussions predicated upon such information with members of the Equity Trading Department by engaging in brief conversations with them on the firm's trading floor; and A member of the Research Department also discussed the Z information with a member of the Arbitrage Department staff.

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Restricted List Procedure 39. The firm's QRL Procedures and their implementation did not prevent trading in Z while the firm was in possession of material non-public information with regard to that security as follows: (i) On January 30, 1986 trading in Z securities occurred despite Z's inclusion on the QRL for nine days. (a) While the QRL was distributed to a Co-Head of the Equity Department and the Manager of the IBD, procedures were not in place to assure that they were alerted

to its contents and required to take appropriate steps to prevent trading in restricted securities by their subordinates. (b) The Co-Head of the Equity Department was apparently unaware of the QRL's contents for at least two months; (c) The Manager of the IBD was unaware that Z was included on the QRL at the time he directed a sale in Z; and (d) Further trading occurred in Z Securities subsequent to the execution of the transaction ordered by the Manager of the IBD. 40. The firm has represented that after the undertaking entered into in conjunction with the settlement of the SEC's Injunctive Proceeding, Modified Chinese Wall and QRL procedures were adopted.

X and Y 41. As a Co-Head of the Equity Department, X's responsibilities included the implementation of the firm's QRL procedures. X was therefore obligated to assure that he personally or an appropriate subordinate be kept apprised of the contents of the QRL. The QRL was distributed to X by the firm's Legal Department and X directed his secretary to maintain it and notify him and other responsible personnel of any changes. X has acknowledged that for two months he was not aware of the contents of or any changes to the QRL. X's failure to assure that the QRL procedure was properly implemented contributed to the trading which occurred on January 30, 1986 in the securities of Z, a QRL listed security. Furthermore, X failed to check the QRL after his conversation with the Insurance Analyst regarding upcoming significant events affecting Z. In addition, after a later conversation with a staff member of the Corporate Finance Department during which he was advised that Z should not be traded, X neither checked the QRL or took any other steps to assure that trading would not occur.

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In fact, unknown to X, further trading in Z securities occurred subsequent to that conversation. Y, as Manager of the Institutional Block Trading Desk, was responsible for preventing trading in QRL listed securities by IBD traders. The QRL was distributed to Y and he had the obligation to be aware of its contents and to take necessary steps to assure that traders under his supervision did not effect transactions in QRL listed securities. On January 24, 1986, an IBD trader reporting to Y acquired a 21,000 share position in Z Common Stock from the Convertible Preferred Desk while Z was included on the QRL. However, Y was unaware of this position and that it was in a QRL listed security until January 30, 1986. On the morning of January 30, 1986, the Insurance Analyst approached Y at the IBD. During a short conversation, the Insurance Analyst indicated that a significant negative announcement with respect to Z would be forthcoming. Y believed that he was receiving only an analyst's opinion of Z. Immediately thereafter, Y determined from a trader that a 21,000 share position in Z Common Stock was being held by the IBD. Without checking the QRL which was in his possession and which included Z, Y instructed the trader to liquidate the position. After liquidating the 21,000 share position, the trader engaged, at his own discretion and without the knowledge of Y, in a series of put and call option transactions in Z and a purchase of Z Common Stock. Certain of these transactions occurred after Y learned that Z was included on the QRL.

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The firm, X, and Y have represented the following: 60. At the time the discussions between Z staff and the firm representatives were initiated (see paragraphs 11-l8 above), X and Y were neither involved in nor aware of such discussions.

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X and Y were not made aware of the transfer, on January 24, 1986, of a 21,000 share position in Z Common Stock from the firm's Convertible Preferred Desk to the Institutional Block Trading Desk. The direction by the firm Legal Department that the Convertible Preferred Desk position in Z not be traded was not communicated to X or Y. Y was not told the Z information was confidential when the Insurance Analyst spoke to him. X was unaware of the sale on January 30, 1986 at 9:48 am. of 21,000 shares of Z Common Stock when it occurred. On January 30, 1986, subsequent to the sale of the 21,000 shares of Z, Y, in referring to the QRL, learned that Z was on it. He immediately realized that the 21,000 share trade which he had directed to be made was in violation of the QRL procedures and thereafter reported what had occurred to X. The firm's Legal Department was also alerted to what had occurred within 24 hours of the 21,000 share trade and the purchase of the put options. X insisted that the matter be brought to the attention of the top management of the firm, and this was done. Y cooperated with the firm's Management in every respect. The matter was thereafter promptly reported to the Exchange and SEC.

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Consideration of SEC Proceeding 68. In entering into this Stipulation of Facts and Consent to Penalty with respect to the firm, the Division of Enforcement has taken into account the Injunctive Proceeding initiated by the SEC which resulted in the imposition of sanctions including disgorgement and a civil fine and also required that the firm review its Chinese Wall procedures and submit a report of that review to the SEC.

DISCUSSION AND DECISION With Respect to The First Boston Corporation The Hearing Panel, in accepting the Stipulation of Facts and Consent to Penalty, found The First Boston Corporation guilty as set forth above, by unanimous vote. With Respect to X and Y

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The Hearing Panel, by unanimous vote, rejects the Stipulation of Facts and Consent to Penalty ("Stipulation") with regard to X and Y. In the Stipulation X consented to a finding by the Hearing Panel that he violated Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with supervision and control of the activities of those em~yees related to the business of their employer and compliance with securities laws and regulations with respect to compliance with the Quiet Restricted List procedure by the Equity Department. In the Stipulation, Y consented to a finding by the Hearing Panel that he engaged in violations of Exchange Rule 342(a) in that he failed to reasonably discharge his duties and obligations in connection with supervision and control of the activities of those employees related to the business of their employers and compliance with securities laws and regulations with respect to (i) compliance with the Quiet Restricted List procedure by the Institutional Block Trading Desk; and (ii) by ordering a trader to sell a security which was included on the Quiet Restricted List. Exchange Rule 342(a) reads as follows: "Rule 342 (a) Each office, department or business activity of a member or member organization shall be under the supervision and control of the member or member organization establishing it and of the personnel delegated such authority and responsibility. "The person in charge of a group of employees shall reasonably discharge his duties and obligations in connection with supervision and control of the activities of those employees related to the business of their employer and compliance with securities laws and regulations". In the Stipulation both X and Y consent to a finding that they violated the language contained in the second paragraph of Rule 342(a). X consented to the imposition of the penalty of a censure and a fine of $20,000 while Y consented to the imposition of a censure and a fine of $40,000. At the hearing in the above matter, the firm and X and Y and the Division of Enforcement were represented by counsel. Based upon the facts contained in the Stipulation together with the clarifications furnished to the Hearing Panel at the hearing by the parties in response to questions, the Hearing Panel finds that neither X nor Y are guilty of violating Rule 342(a). The reasons for the Hearing Panel's findings Include the following: 1) The Panel concluded that the real cause of the events which precipitated this disciplinary proceeding was the firm's failure to control the dissemination of non-public information within the

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firm, rather than X's or Y's failure to check the Quiet Restricted List. The real breakdown of control occurred when a junior analyst at the firm was instructed by his superior to convey to Y information regarding an impending negative announcement by Z which could have a negative effect on the value of Z's securities. The senior analyst gave that instruction despite the fact that the representative of the firm's Corporate Finance Department who had told the junior analyst about the pending announcement had Instructed the analyst to tell only his superior so that he and his superior could be available to respond to inquiries subsequent to the announcement. 2) At the hearing it was acknowledged that it was not uncommon for members of the research staff to enter the trading room and acquaint the traders with their opinions on securities. Indeed it was acknowledged that such visits by analysts to the trading room were quite common. Accordingly, the Panel found it not unreasonable for X and Y to believe that when the junior analyst spoke to them on January 30, 1986 they were receiving only an analyst's opinion with regard to Z's securities. While the Panel acknowledges that both X and Y were remiss in not checking the Quiet Restricted List regarding Z securities, the Panel did not conclude that their failure to do so was sufficient evidence to support a charge based upon the second paragraph of Rule 342(a), which requires a finding that X and Y did not reasonably discharge their duties. This conclusion is supported by the following additional facts: (a) that X was not told of any Z transactions; (b) that Y was unaware that one of his traders had acquired a 21,000 share position in Z common stock on January 24, 1986; (c) that neither X nor Y was involved in or aware of the discussions with Z commencing on January 20, 1986; (d) that the direction by the firm's Legal Department that the Convertible Preferred Desk position in Z not be traded was not communicated to X or Y; (e) that Y was not told the information was confidential when the junior analyst spoke to him; and (f) that X was unaware of the sale on January 30, 1986 at 9:48 a.m. of 21,000 shares of Z common stock when it occurred. Further, in determining whether X and Y reasonably discharged their duties of supervision and control, the Panel believes the events must be considered in the context of the myriad of activities that occur in the rapid-pace environment of a trading room.

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The Panel also concluded that X and Y were to a large extent victims of deficiencies of the firm's supervisory control over the dissemination of material non-public information in areas of the firm which they did not supervise, and its failure to establish an adequate separate system of follow-up and review to assure that its Chinese Wall and Quiet Restricted List procedures were being complied with. Another significant consideration for the Panel was the fact that on January 30, 1986, the day the 21,000 shares of Z securities were sold, Y, upon learning that Z was on the QRL immediately realized that the trade was in violation of the QRL procedures and reported what had occurred to X. The firm's Legal Department was alerted within 24 hours of the 21,000 share trade and the purchases of the put options. At X's Insistence the matter was brought to the attention of top management of the firm and Y cooperated with firm management in every respect. Indeed, the entire matter was promptly thereafter reported to the Exchange and the SEC. PENALTY

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In view of the above findings, the Hearing Panel, by unanimous vote, Imposed the penalty consented to by The First Boston Corporation of a censure and a fine of $60,000.

For the Hearing Panel

James F. Swartz, Jr. Hearing Officer