In the Matter of Jack C. Smith, Jr.

Torrey Pines Securities, Inc. (Torrey) was a broker-dealer registered with the Securities and Exchange Commission (SEC) (plaintiff). Jack Smith (defendant) was the sole owner of Torrey until Dennis Keating and another individual became registered representatives and purchased interests in the firm. Smith remained the president and chief executive officer and had overall supervisory responsibility for Torrey. Torrey was headquartered in Del Mar, California. When Keating joined Torrey, he opened a branch in Corona, California, and had supervisory responsibility for the branch. According to Torrey’s written supervisory-procedures manual, Smith was responsible for establishing the firm’s supervisory policies and procedures and the systems to implement them. When Keating joined Torrey, Smith failed to establish policies and procedures to supervise Keating. Smith did not revise the manual or create other policies or procedures for Keating to be supervised reasonably at the Corona branch office. Smith delegated to the branch manager the responsibility of supervising Keating’s trading activities, but Keating himself oversaw the other daily activities of the office. No one reviewed Keating’s correspondence or telephone calls. While Keating had supervisory responsibility for the Corona office, he formed a privately held company and raised millions of dollars from friends, family, and Torrey’s customers in a private, unregistered securities offering. Keating falsely assured investors they would receive a return on their investments. Because Keating acted outside the scope of his employment, he acted as an unregistered broker-dealer in violation of § 15(a) of the Securities Exchange Act of 1934 (SEA). Keating was permanently enjoined from violating the broker-dealer registration and antifraud provisions of the securities laws and barred from associating with a broker-dealer or investment adviser. Pursuant to SEA § 15(b)(6), the SEC instituted public administrative proceedings against Smith for failure to supervise, made findings, and imposed sanctions.