In the Matter of Lehman Brothers, Inc.

Lehman Brothers, Inc. (Lehman) (defendant) was a registered broker-dealer. Lehman acquired assets of the retail brokerage business of SG Cowen Securities Corporation (SGC). Frank Gruttadauria, who had been the manager of SGC’s Cleveland, Ohio, branch office, became the branch-office manager of Lehman’s Cleveland office. Gruttadauria was a producing branch-office manager, meaning he was responsible for his own retail brokerage customers as well as overall supervision of the Cleveland branch. Lehman assigned the branch’s administrative manager to oversee the day-to-day sales activity, including the review of all incoming and outgoing correspondence, and the branch’s operations manager to review and approve requests for third-party disbursements. Gruttadauria had input in determining the compensation and continued employment of the administrative manager and operations manager. A fax machine that only Gruttadauria and his sales assistants were authorized to use was located outside of Gruttadauria’s office. Gruttadauria had a key to the secure area in which the office’s postage meter was located and used a personal computer that was not networked to the company-wide system. Fifteen months after becoming employed by Lehman, Gruttadauria disappeared and confessed in a letter to the Federal Bureau of Investigation that he had misappropriated millions of dollars from customers over a 15-year period. Gruttadauria pled guilty to charges of securities fraud and mail fraud for lying to customers about securities purchases and sales, misappropriating funds and securities, and sending falsified account documents. At Lehman, Gruttadauria used the fax machine outside his office to send and receive correspondence that furthered his fraud, his personal computer to generate falsified account statements, his key to the postage-meter area to mail the account statements, and account addresses he had falsified at SGC. The Securities and Exchange Commission (SEC) (plaintiff) instituted administrative proceedings, alleging that Lehman failed to reasonably supervise Gruttadauria with a view to preventing and detecting his violations of the federal securities laws.