In the Matter of : AND CEASE-AND-DESIST PROCEEDINGS,

 
 
 
 
 
 
 
 
 
 
 
     
  
                        
     
   
     
   
 
 
 
 
 
 
UNITED STATES OF AMERICA 

Before the
 
SECURITIES AND EXCHANGE COMMISSION 

SECURTIES EXCHANGE ACT OF 1934 
Release No. 64221 / April 7, 2011 
ADMINISTRATIVE PROCEEDING 
File No. 3-14326 
______________________________ 
: ORDER INSTITUTING ADMINISTRATIVE 
In the Matter of : AND CEASE-AND-DESIST PROCEEDINGS,  
:            PURSUANT            TO            SECTIONS 15(b) AND 21C   
: OF THE SECURITIES EXCHANGE 
Frederick O. Kraus, : ACT OF 1934, MAKING FINDINGS, AND  
: IMPOSING REMEDIAL SANCTIONS AND  
Respondent. : A CEASE-AND-DESIST ORDER  
______________________________: 
I. 
The Securities and Exchange Commission (“Commission”) deems it appropriate and in 
the public interest that public administrative and cease-and-desist proceedings be, and hereby 
are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 
(“Exchange Act”) against Frederick O. Kraus (“Kraus” or “Respondent”). 
II. 
In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the 
findings herein, except as to the Commission’s jurisdiction over him and the subject matter of 
these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the 
Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a 
Cease-and-Desist (“Order”), as set forth below. 

 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
                                                 
      
  
III. 
On the basis of this Order and Respondent’s Offer, the Commission finds that
1
: 
Summary 
These proceedings arise out of violations by GunnAllen Financial, Inc. (“GunnAllen”), 
formerly a Tampa, Florida-based broker-dealer, of Regulation S-P which governs the privacy 
and protection of consumer financial information.  Between March and June 2010, as it was 
winding down its business operations and planned to file for bankruptcy, GunnAllen’s president, 
Kraus, authorized the transfer of approximately 16,000 direct application accounts to 
GunnAllen’s National Sales Manager (the “Sales Manager”), and any broker-dealer with whom 
the Sales Manager affiliated. Direct application accounts are those accounts held by the product 
issuer, typically a mutual fund or insurance company.   
On or before April 23, 2010, when the Sales Manager accepted employment with a new 
broker-dealer and resigned from GunnAllen, he downloaded nonpublic customer information for 
the 16,000 accounts on a portable thumb drive.  Two weeks after joining the new broker-dealer, 
the Sales Manager mailed a letter (its content was previously reviewed and approved by Kraus), 
on GunnAllen letterhead notifying the account holders that GunnAllen could no longer service 
the accounts, that he and his business partner were servicing the accounts, and advising them of 
their right to “opt out” of the transfer.  This after the fact notice failed to provide customers with 
a reasonable opportunity to opt out of the transfer because, among other things, it did not provide 
procedures on how to exercise that right, contact information or even the identity of the new 
broker-dealer.  Thereafter, the Sales Manager supplied the broker-dealer receiving the accounts 
with nonpublic personal information for the 16,000 accounts, including the product custodian, 
the account holder’s name and address, and the account number and value for each account. 
GunnAllen’s transfer of this nonpublic information without providing its customers 
reasonable notice to opt out violated Rule 10(a)(1) of Regulation S-P (17 C.F.R. §248.10(a)(1)), 
which prohibits broker-dealers from disclosing nonpublic personal information they collect from 
customers to nonaffiliated third parties unless they notify their customers of their right to opt out 
of the disclosure in accordance with Rule 7(a) of Regulation S-P (17 C.F.R. §248.7(a)), and they 
provide their customers with a reasonable opportunity to opt out of the disclosure.  The customer 
information was also transferred to the Sales Manager, and thereafter, the receiving broker, in a 
manner that placed the information at substantial risk of unauthorized access and use in 
contravention of GunnAllen’s obligation to ensure the security and confidentiality of the 
information as required by Rule 30(a) of Regulation S-P (the “Safeguard Rule”) (17 C.F.R. 
§248.30(a)).  As a result, Kraus aided and abetted and caused GunnAllen’s violations of Rules 
7(a), 10(a) and 30(a) of Regulation S-P.    
Respondent 
 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other 
persons or entities in this or any other proceeding. 
2
 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1. Kraus, age 56, resides in St. Petersburg, Florida.  From September 2009 to 
September 2010, Kraus served as President of GunnAllen.  Kraus also served as GunnAllen’s 
Chief Financial Officer from October 2008 to September 2010, and the firm’s Director of 
Supervision from January 2005 to August 2009. 
GunnAllen Financial, Inc. 
2. GunnAllen had a principal place of business in Tampa, Florida and was 
registered with the Commission as a broker-dealer from March 1986 to April 2010.  The firm 
operated mostly under an independent contractor model and maintained franchise offices 
nationwide.   In March 2010, the Financial Industry Regulatory Authority (FINRA) determined 
that GunnAllen did not have the requisite net capital to conduct business as a broker-dealer and 
restricted its operations to liquidating securities transactions.  Unable to raise the additional 
capital it needed to continue to conduct business, in April 2010 GunnAllen discontinued its 
operations, filed for bankruptcy, and submitted a Broker-Dealer Withdrawal, or “BDW”, Form 
with the Commission withdrawing its registration.  The withdrawal became effective on June 11, 
2010. 
The Account Transfers 
3. As it was winding down its business operations in March and April 2010, 
GunnAllen and its registered representatives transferred the firm’s customer accounts to other 
broker-dealers.  In addition to servicing the brokerage accounts held by its clearing firm, 
GunnAllen serviced and was the broker of record on tens of thousands of direct application 
accounts held by various mutual fund and variable annuity and insurance companies.  As broker 
of record on the direct application accounts, GunnAllen was entitled to the commissions, trailers 
and other fees generated by the accounts. 
4. On March 28, 2010, GunnAllen sent a letter, drafted by the Sales Manager but 
reviewed and approved by Kraus, to all of the firm’s direct application account customers 
notifying them that it expected to cease operations on March 31, 2010 (the “First  Notice”).  The 
First Notice instructed customers that they had three options for arranging ongoing service of 
their accounts: (i) they could contact their GunnAllen registered representative to make 
arrangements to transfer their account to the new firm with which he or she associated, (ii) they 
could contact a brokerage firm of their own choice and request their account be transferred to 
that firm, or (iii) they could contact the mutual fund or variable annuity or insurance company 
holding their investment directly to make arrangements for service. 
5. However, on March 30, 2010, just two days after GunnAllen sent the First Notice, 
Kraus authorized the transfer of approximately 16,000 direct application accounts serviced by 
GunnAllen to the Sales Manager.  Kraus executed “Block Broker-Dealer Change Authorization 
for Directly Held Accounts” forms (the “Block Transfer Forms”) covering those accounts and 
gave the signed Block Transfer Forms to the Sales Manager and another GunnAllen 
representative with whom the Sales Manager planned to form a business partnership when 
GunnAllen ceased doing business.  By signing the Block Transfer Forms and turning them over 
to the Sales Manager and his partner, Kraus authorized the transfer of the 16,000 accounts to any 
3
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
broker-dealer that the Sales Manager and his partner chose to associate with after they left 
GunnAllen. 
6. In April 2010, while assisting Kraus in the wind down of GunnAllen’s business 
operations, the Sales Manager and his partner sought employment with other brokerage firms by 
offering, among other things, to transfer to them the direct application accounts for which they 
held the Block Transfer Forms.  On April 23, 2010, they were hired by another broker-dealer 
registered with the Commission (the “Receiving Broker”).   The Sales Manager and his partner 
agreed to share 10% of the commissions, trailers and other fees generated by the accounts with 
the Receiving Broker and to solicit the account holders to purchase additional products from the 
Receiving Broker.  On that same day, the Sales Manager resigned from GunnAllen.  
7. On April 23, 2010, or shortly before then, the Sales Manager downloaded a 
spreadsheet from a GunnAllen computer server or drive to a personal thumb drive and physically 
removed it from the firm.  The spreadsheet contained the custodian, account holder’s name and 
address, account number and value of the approximately 16,000 direct application accounts 
covered by the Block Transfer Forms authorized by Kraus.  The spreadsheet indicated that the 
direct application accounts included therein, in the aggregate, had a stated but not confirmed 
estimated total value of $850 million as of March 23, 2010.        
8. Two weeks after associating with the Receiving Broker, on May 14, 2010, the 
Sales Manager sent the GunnAllen customers holding the direct application accounts a letter 
notifying them that their accounts would be transferred to the brokerage firm he was newly 
associated with unless they objected to the transfer within fifteen days of the date of the letter 
(the “Second Notice”).  Although the Sales Manager drafted and personally paid for the cost of 
copying and mailing the letter, its content was reviewed and approved previously by Kraus, and 
it was sent on GunnAllen letterhead.  The Sales Manager engaged a third party vendor to copy 
and mail the Second Notice on his behalf and supplied it with the customer names and addresses 
he took from GunnAllen on his thumb drive. 
9. After mailing the Second Notice, the Sales Manager contacted GunnAllen to see 
if it had received notices from any customers seeking to opt out of the account transfer, but did 
not take any other steps to verify customer objections to the transfer and, thereafter, e-mailed the 
Receiving Broker the customer account information that he had taken from GunnAllen on his 
thumb drive.  His partner also supplied the Receiving Broker with the Block Transfer Forms 
signed by Kraus. 
10. Beginning on June 3, 2010, and continuing through at least June 7, 2010, the  
Receiving Broker counter-signed the Block Transfer Forms accepting the direct application 
accounts from GunnAllen.   It also delivered the fully executed forms to the appropriate mutual 
fund and variable annuity and insurance companies along with a letter instructing them to change 
the broker of record on the direct application accounts from GunnAllen to the Receiving Broker. 
4
 

 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
Violations of the Privacy Rules 
11. Rule 10(a) of Regulation S-P prohibits brokers and dealers, either directly or 
through an affiliate, from disclosing nonpublic personal information about their customers to 
nonaffiliated third parties unless they have provided their customers with a privacy notice 
describing the nonpublic personal information they disclose, and notify their customers of their 
right to opt out of any disclosure and afford them a reasonable opportunity to opt out of the 
disclosure before it is made. 
12. Rule 7(a) of Regulation S-P requires brokers and dealers to provide their 
customers with opt out notices that are clear and conspicuous and that accurately explain 
customers’ opt out rights.  The notice must explicitly state that the broker or dealer discloses, or 
reserves the right to disclose, nonpublic personal information about its customers and that they 
have the right to opt out of any disclosure. Additionally, the notice must provide a reasonable 
means by which customers can exercise their right to opt out.  
13. GunnAllen violated Rules 7(a) and 10(a) of Regulation S-P by failing to provide 
the direct application account customers whose accounts were transferred to the Receiving 
Broker with proper notice and a reasonable opportunity to opt out of the transfer before 
supplying their personal nonpublic information to the Sales Manager and the Receiving Broker.  
Also, GunnAllen’s disclosure of the information was not covered by any exception from 
Regulation S-P’s notice and opt out requirements, including an exception in Rule 14 of 
Regulation S-P for disclosures that are required, or are a usual, appropriate, or acceptable 
method, in connection with the transfer of accounts, because GunnAllen failed to obtain the 
customers’ affirmative consent to transfer the direct applications accounts.  The First and Second 
Notices failed to inform account holders that GunnAllen would physically transfer or, in the case 
of the Second Notice, had physically transferred, their account information.  The Second Notice 
also failed to provide account holders with a reasonable means to exercise their right to opt out 
of the transfer, or sufficient time within which to do so.  Further, the direct application account 
customers were not provided with a paper or electronic form to object to the transfer although 
Rule 7(a)(2)(iii) of Regulation S-P expressly states it is unreasonable “if the only means of 
opting out is for the consumer to write his or her own letter to exercise the opt out right.”  
Finally, the Second Notice provided only fifteen days to opt out of the transfer although the 
circumstances did not warrant such a short response period. 
14. As a result of the conduct described above, Kraus willfully aided and abetted and 
caused GunnAllen’s violations of Rules 7(a) and 10(a) of Regulation S-P under the Exchange 
Act. 
Violations of the Safeguard Rule 
15. Rule 30(a) of Regulation S-P, or the Safeguard Rule, requires every broker and 
dealer to maintain policies and procedures that address administrative, technical, and physical 
safeguards for the protection of customer records and information.  The policies and procedures 
must be reasonably designed to (1) insure the security and confidentiality of customer records 
5
 

 
 
 
 
  
 
 
 
 
 
 
  
  
 
 
 
and information; (2) protect against any anticipated threats or hazards to the security or integrity 
of customer records and information; and (3) protect against unauthorized access to or use of 
customer records or information that could result in substantial harm or inconvenience to any 
customer. 
16. GunnAllen violated Rule 30(a) of Regulation S-P because it knew that there was a 
reasonably foreseeable risk that its departing registered representatives would disclose customer 
nonpublic personal information to successor brokerage firms but nonetheless failed to adopt, and 
did not have in place while winding down its operations, any written policies or procedures 
addressing the transfer and protection of such information.   
17. As president of GunnAllen, Kraus was familiar with Regulation S-P and 
GunnAllen’s responsibilities under the rule for maintaining the confidentiality and physical 
security of the information that the firm collected from its customers.  Nonetheless, he 
knowingly placed customer information at substantial risk of unauthorized access and misuse 
when he executed the Block Transfer Forms and authorized the Sales Manager to download 
customer information for approximately 16,000 GunnAllen direct application accounts to a 
personal thumb drive that he physically took from the firm.   
18. As a result of the conduct described above, Kraus willfully aided and abetted and 
caused GunnAllen’s violations of Rule 30(a) of Regulation S-P.  
IV. 
In view of the foregoing, the Commission deems it appropriate and in the public interest 
to impose the sanctions agreed to in Respondent’s Offer. 
Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act, it is hereby 
ORDERED that: 
A. Respondent Kraus cease and desist from committing or causing any violations and 
any future violations of Rules 7(a), 10(a) and 30(a) of Regulation S-P under the Exchange Act. 
B.	 R 
espondent Kraus is censured. 
C. Respondent Kraus shall pay a civil money penalty of $20,000 to the United States 
Treasury.  Payment shall be made in the following installments: $5,000 within 10 days of the 
entry of this Order; $5,000 within 90 days of the entry of this Order; $5,000 within 180 days of 
the entry of this Order; and $5,000 within 270 days of the entry of this Order.  If any payment is 
not made by the date the payment is required by this Order, the entire outstanding balance of the 
civil penalty, plus any interest accrued pursuant to 31 U.S.C. 3717, shall be due and payable 
immediately, without further application.  Payments shall be: (A) made by wire transfer, United 
States postal money order, certified check, bank cashier’s check, or bank money order; (B) 
payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office 
of Financial Management, Securities and Exchange Commission, Operations Center, 6432 
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General Green Way, Alexandria, VA  22312-0003; and (D) submitted under cover letter that 
identifies Respondent’s name as a Respondent in these proceedings, the file number of these 
proceedings, a copy of which cover letter and wire transfer, money order or check shall be sent 
to Teresa J. Verges, Assistant Regional Director, Miami Regional Office, Securities and 
Exchange Commission, 801 Brickell Avenue,  Suite 1800, Miami, FL 33131. 
By the Commission. 
Elizabeth M. Murphy 
       Secretary 
7
 

 
 
 
 
   
  
 
 
 
 
   
  
 
 
 
 
 
 
                                                                                                                                                                                                                        
 
Service List 
Rule 141 of the Commission's Rules of Practice provides that the Secretary, or another 
duly authorized officer of the Commission, shall serve a copy of the Order Instituting 
Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21C of the 
Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-
and-Desist Order ("Order"), on the Respondent and his legal agent. 
The attached Order has been sent to the following parties and other persons entitled to 
notice: 
Honorable Brenda P. Murray 
Chief Administrative Law Judge 
Securities and Exchange Commission 
100 F Street, N.E. 
Washington, DC 20549-2557                                                
Teresa J. Verges, Esq. 
Miami Regional Office 
Securities and Exchange Commission 
801 Brickell Avenue, Suite 1800 
Miami, FL  33131 
Frederick O. Kraus 
c/o Burton W. Wiand, Esq. 
Wiand Guerra King 
3000 Bayport Drive 
Tampa, FL  33607 
Burton W. Wiand, Esq. 
Wiand Guerra King 
3000 Bayport Drive 
Tampa, FL  33607 
8
 

UNITED STATES OF AMERICA 

Before the
 

SECURITIES AND EXCHANGE COMMISSION 


SECURTIES EXCHANGE ACT OF 1934 
Release No. 64221 / April 7, 2011 

ADMINISTRATIVE PROCEEDING 
File No. 3-14326 
______________________________ 

: ORDER INSTITUTING ADMINISTRATIVE 
In the Matter of : AND CEASE-AND-DESIST PROCEEDINGS,  

: PURSUANT TO SECTIONS 15(b) AND 21C   
: OF THE SECURITIES EXCHANGE 

Frederick O. Kraus, : ACT OF 1934, MAKING FINDINGS, AND  
: IMPOSING REMEDIAL SANCTIONS AND  

Respondent. : A CEASE-AND-DESIST ORDER  
______________________________: 

I. 

The Securities and Exchange Commission (“Commission”) deems it appropriate and in 
the public interest that public administrative and cease-and-desist proceedings be, and hereby 
are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 
(“Exchange Act”) against Frederick O. Kraus (“Kraus” or “Respondent”). 

II. 

In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the 
findings herein, except as to the Commission’s jurisdiction over him and the subject matter of 
these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the 
Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a 
Cease-and-Desist (“Order”), as set forth below. 



 

 
 

 

 
 

 

 

 

 

  
 

 

 

 
 

 
                                                 
      

  

III. 

On the basis of this Order and Respondent’s Offer, the Commission finds that1: 

Summary 

These proceedings arise out of violations by GunnAllen Financial, Inc. (“GunnAllen”), 
formerly a Tampa, Florida-based broker-dealer, of Regulation S-P which governs the privacy 
and protection of consumer financial information.  Between March and June 2010, as it was 
winding down its business operations and planned to file for bankruptcy, GunnAllen’s president, 
Kraus, authorized the transfer of approximately 16,000 direct application accounts to 
GunnAllen’s National Sales Manager (the “Sales Manager”), and any broker-dealer with whom 
the Sales Manager affiliated. Direct application accounts are those accounts held by the product 
issuer, typically a mutual fund or insurance company.   

On or before April 23, 2010, when the Sales Manager accepted employment with a new 
broker-dealer and resigned from GunnAllen, he downloaded nonpublic customer information for 
the 16,000 accounts on a portable thumb drive. Two weeks after joining the new broker-dealer, 
the Sales Manager mailed a letter (its content was previously reviewed and approved by Kraus), 
on GunnAllen letterhead notifying the account holders that GunnAllen could no longer service 
the accounts, that he and his business partner were servicing the accounts, and advising them of 
their right to “opt out” of the transfer.  This after the fact notice failed to provide customers with 
a reasonable opportunity to opt out of the transfer because, among other things, it did not provide 
procedures on how to exercise that right, contact information or even the identity of the new 
broker-dealer. Thereafter, the Sales Manager supplied the broker-dealer receiving the accounts 
with nonpublic personal information for the 16,000 accounts, including the product custodian, 
the account holder’s name and address, and the account number and value for each account. 

GunnAllen’s transfer of this nonpublic information without providing its customers 
reasonable notice to opt out violated Rule 10(a)(1) of Regulation S-P (17 C.F.R. §248.10(a)(1)), 
which prohibits broker-dealers from disclosing nonpublic personal information they collect from 
customers to nonaffiliated third parties unless they notify their customers of their right to opt out 
of the disclosure in accordance with Rule 7(a) of Regulation S-P (17 C.F.R. §248.7(a)), and they 
provide their customers with a reasonable opportunity to opt out of the disclosure.  The customer 
information was also transferred to the Sales Manager, and thereafter, the receiving broker, in a 
manner that placed the information at substantial risk of unauthorized access and use in 
contravention of GunnAllen’s obligation to ensure the security and confidentiality of the 
information as required by Rule 30(a) of Regulation S-P (the “Safeguard Rule”) (17 C.F.R. 
§248.30(a)). As a result, Kraus aided and abetted and caused GunnAllen’s violations of Rules 
7(a), 10(a) and 30(a) of Regulation S-P.    

Respondent 

 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other 
persons or entities in this or any other proceeding. 

2
 

1



 

 

 

 
 

 
 

 

 

 
 

 
 

 
 

 

 
 

 

1. Kraus, age 56, resides in St. Petersburg, Florida.  From September 2009 to 
September 2010, Kraus served as President of GunnAllen.  Kraus also served as GunnAllen’s 
Chief Financial Officer from October 2008 to September 2010, and the firm’s Director of 
Supervision from January 2005 to August 2009. 

GunnAllen Financial, Inc. 

2.  GunnAllen had a principal place of business in Tampa, Florida and was 
registered with the Commission as a broker-dealer from March 1986 to April 2010.  The firm 
operated mostly under an independent contractor model and maintained franchise offices 
nationwide. In March 2010, the Financial Industry Regulatory Authority (FINRA) determined 
that GunnAllen did not have the requisite net capital to conduct business as a broker-dealer and 
restricted its operations to liquidating securities transactions.  Unable to raise the additional 
capital it needed to continue to conduct business, in April 2010 GunnAllen discontinued its 
operations, filed for bankruptcy, and submitted a Broker-Dealer Withdrawal, or “BDW”, Form 
with the Commission withdrawing its registration.  The withdrawal became effective on June 11, 
2010. 

The Account Transfers 

3. As it was winding down its business operations in March and April 2010, 
GunnAllen and its registered representatives transferred the firm’s customer accounts to other 
broker-dealers. In addition to servicing the brokerage accounts held by its clearing firm, 
GunnAllen serviced and was the broker of record on tens of thousands of direct application 
accounts held by various mutual fund and variable annuity and insurance companies.  As broker 
of record on the direct application accounts, GunnAllen was entitled to the commissions, trailers 
and other fees generated by the accounts. 

4. On March 28, 2010, GunnAllen sent a letter, drafted by the Sales Manager but 
reviewed and approved by Kraus, to all of the firm’s direct application account customers 
notifying them that it expected to cease operations on March 31, 2010 (the “First  Notice”). The 
First Notice instructed customers that they had three options for arranging ongoing service of 
their accounts: (i) they could contact their GunnAllen registered representative to make 
arrangements to transfer their account to the new firm with which he or she associated, (ii) they 
could contact a brokerage firm of their own choice and request their account be transferred to 
that firm, or (iii) they could contact the mutual fund or variable annuity or insurance company 
holding their investment directly to make arrangements for service. 

5. However, on March 30, 2010, just two days after GunnAllen sent the First Notice, 
Kraus authorized the transfer of approximately 16,000 direct application accounts serviced by 
GunnAllen to the Sales Manager. Kraus executed “Block Broker-Dealer Change Authorization 
for Directly Held Accounts” forms (the “Block Transfer Forms”) covering those accounts and 
gave the signed Block Transfer Forms to the Sales Manager and another GunnAllen 
representative with whom the Sales Manager planned to form a business partnership when 
GunnAllen ceased doing business.  By signing the Block Transfer Forms and turning them over 
to the Sales Manager and his partner, Kraus authorized the transfer of the 16,000 accounts to any 

3
 



 

 

 

 
 

 
 

 

 
 

 

 
 

 

 
 

 

 
 

 

broker-dealer that the Sales Manager and his partner chose to associate with after they left 
GunnAllen. 

6.  In April 2010, while assisting Kraus in the wind down of GunnAllen’s business 
operations, the Sales Manager and his partner sought employment with other brokerage firms by 
offering, among other things, to transfer to them the direct application accounts for which they 
held the Block Transfer Forms.  On April 23, 2010, they were hired by another broker-dealer 
registered with the Commission (the “Receiving Broker”).  The Sales Manager and his partner 
agreed to share 10% of the commissions, trailers and other fees generated by the accounts with 
the Receiving Broker and to solicit the account holders to purchase additional products from the 
Receiving Broker.  On that same day, the Sales Manager resigned from GunnAllen.  

7. On April 23, 2010, or shortly before then, the Sales Manager downloaded a 
spreadsheet from a GunnAllen computer server or drive to a personal thumb drive and physically 
removed it from the firm.  The spreadsheet contained the custodian, account holder’s name and 
address, account number and value of the approximately 16,000 direct application accounts 
covered by the Block Transfer Forms authorized by Kraus.  The spreadsheet indicated that the 
direct application accounts included therein, in the aggregate, had a stated but not confirmed 
estimated total value of $850 million as of March 23, 2010.        

8. Two weeks after associating with the Receiving Broker, on May 14, 2010, the 
Sales Manager sent the GunnAllen customers holding the direct application accounts a letter 
notifying them that their accounts would be transferred to the brokerage firm he was newly 
associated with unless they objected to the transfer within fifteen days of the date of the letter 
(the “Second Notice”). Although the Sales Manager drafted and personally paid for the cost of 
copying and mailing the letter, its content was reviewed and approved previously by Kraus, and 
it was sent on GunnAllen letterhead. The Sales Manager engaged a third party vendor to copy 
and mail the Second Notice on his behalf and supplied it with the customer names and addresses 
he took from GunnAllen on his thumb drive. 

9. After mailing the Second Notice, the Sales Manager contacted GunnAllen to see 
if it had received notices from any customers seeking to opt out of the account transfer, but did 
not take any other steps to verify customer objections to the transfer and, thereafter, e-mailed the 
Receiving Broker the customer account information that he had taken from GunnAllen on his 
thumb drive.  His partner also supplied the Receiving Broker with the Block Transfer Forms 
signed by Kraus. 

10. Beginning on June 3, 2010, and continuing through at least June 7, 2010, the  
Receiving Broker counter-signed the Block Transfer Forms accepting the direct application 
accounts from GunnAllen. It also delivered the fully executed forms to the appropriate mutual 
fund and variable annuity and insurance companies along with a letter instructing them to change 
the broker of record on the direct application accounts from GunnAllen to the Receiving Broker. 

4
 



 

 
 

 
 

 
 

 
 

 

     
 

 
 

 
 

Violations of the Privacy Rules 

11. Rule 10(a) of Regulation S-P prohibits brokers and dealers, either directly or 
through an affiliate, from disclosing nonpublic personal information about their customers to 
nonaffiliated third parties unless they have provided their customers with a privacy notice 
describing the nonpublic personal information they disclose, and notify their customers of their 
right to opt out of any disclosure and afford them a reasonable opportunity to opt out of the 
disclosure before it is made. 

12. Rule 7(a) of Regulation S-P requires brokers and dealers to provide their 
customers with opt out notices that are clear and conspicuous and that accurately explain 
customers’ opt out rights.  The notice must explicitly state that the broker or dealer discloses, or 
reserves the right to disclose, nonpublic personal information about its customers and that they 
have the right to opt out of any disclosure. Additionally, the notice must provide a reasonable 
means by which customers can exercise their right to opt out.  

13. GunnAllen violated Rules 7(a) and 10(a) of Regulation S-P by failing to provide 
the direct application account customers whose accounts were transferred to the Receiving 
Broker with proper notice and a reasonable opportunity to opt out of the transfer before 
supplying their personal nonpublic information to the Sales Manager and the Receiving Broker.  
Also, GunnAllen’s disclosure of the information was not covered by any exception from 
Regulation S-P’s notice and opt out requirements, including an exception in Rule 14 of 
Regulation S-P for disclosures that are required, or are a usual, appropriate, or acceptable 
method, in connection with the transfer of accounts, because GunnAllen failed to obtain the 
customers’ affirmative consent to transfer the direct applications accounts.  The First and Second 
Notices failed to inform account holders that GunnAllen would physically transfer or, in the case 
of the Second Notice, had physically transferred, their account information.  The Second Notice 
also failed to provide account holders with a reasonable means to exercise their right to opt out 
of the transfer, or sufficient time within which to do so.  Further, the direct application account 
customers were not provided with a paper or electronic form to object to the transfer although 
Rule 7(a)(2)(iii) of Regulation S-P expressly states it is unreasonable “if the only means of 
opting out is for the consumer to write his or her own letter to exercise the opt out right.”  
Finally, the Second Notice provided only fifteen days to opt out of the transfer although the 
circumstances did not warrant such a short response period. 

14. As a result of the conduct described above, Kraus willfully aided and abetted and 
caused GunnAllen’s violations of Rules 7(a) and 10(a) of Regulation S-P under the Exchange 
Act. 

Violations of the Safeguard Rule 

15. Rule 30(a) of Regulation S-P, or the Safeguard Rule, requires every broker and 
dealer to maintain policies and procedures that address administrative, technical, and physical 
safeguards for the protection of customer records and information.  The policies and procedures 
must be reasonably designed to (1) insure the security and confidentiality of customer records 

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and information; (2) protect against any anticipated threats or hazards to the security or integrity 
of customer records and information; and (3) protect against unauthorized access to or use of 
customer records or information that could result in substantial harm or inconvenience to any 
customer. 

16. GunnAllen violated Rule 30(a) of Regulation S-P because it knew that there was a 
reasonably foreseeable risk that its departing registered representatives would disclose customer 
nonpublic personal information to successor brokerage firms but nonetheless failed to adopt, and 
did not have in place while winding down its operations, any written policies or procedures 
addressing the transfer and protection of such information.   

17. As president of GunnAllen, Kraus was familiar with Regulation S-P and 
GunnAllen’s responsibilities under the rule for maintaining the confidentiality and physical 
security of the information that the firm collected from its customers.  Nonetheless, he 
knowingly placed customer information at substantial risk of unauthorized access and misuse 
when he executed the Block Transfer Forms and authorized the Sales Manager to download 
customer information for approximately 16,000 GunnAllen direct application accounts to a 
personal thumb drive that he physically took from the firm.   

18. As a result of the conduct described above, Kraus willfully aided and abetted and 
caused GunnAllen’s violations of Rule 30(a) of Regulation S-P.  

IV. 

In view of the foregoing, the Commission deems it appropriate and in the public interest 
to impose the sanctions agreed to in Respondent’s Offer. 

Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act, it is hereby 
ORDERED that: 

A. Respondent Kraus cease and desist from committing or causing any violations and 
any future violations of Rules 7(a), 10(a) and 30(a) of Regulation S-P under the Exchange Act. 

B.	 R 
espondent Kraus is censured. 

C.  Respondent Kraus shall pay a civil money penalty of $20,000 to the United States 
Treasury. Payment shall be made in the following installments: $5,000 within 10 days of the 
entry of this Order; $5,000 within 90 days of the entry of this Order; $5,000 within 180 days of 
the entry of this Order; and $5,000 within 270 days of the entry of this Order.  If any payment is 
not made by the date the payment is required by this Order, the entire outstanding balance of the 
civil penalty, plus any interest accrued pursuant to 31 U.S.C. 3717, shall be due and payable 
immediately, without further application.  Payments shall be: (A) made by wire transfer, United 
States postal money order, certified check, bank cashier’s check, or bank money order; (B) 
payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office 
of Financial Management, Securities and Exchange Commission, Operations Center, 6432 

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General Green Way, Alexandria, VA  22312-0003; and (D) submitted under cover letter that 
identifies Respondent’s name as a Respondent in these proceedings, the file number of these 
proceedings, a copy of which cover letter and wire transfer, money order or check shall be sent 
to Teresa J. Verges, Assistant Regional Director, Miami Regional Office, Securities and 
Exchange Commission, 801 Brickell Avenue,  Suite 1800, Miami, FL 33131. 

By the Commission. 

Elizabeth M. Murphy 
       Secretary  

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Service List 

Rule 141 of the Commission's Rules of Practice provides that the Secretary, or another 
duly authorized officer of the Commission, shall serve a copy of the Order Instituting 
Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21C of the 
Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-
and-Desist Order ("Order"), on the Respondent and his legal agent. 

The attached Order has been sent to the following parties and other persons entitled to 
notice: 

Honorable Brenda P. Murray 
Chief Administrative Law Judge 
Securities and Exchange Commission 
100 F Street, N.E. 
Washington, DC 20549-2557  

Teresa J. Verges, Esq. 
Miami Regional Office 
Securities and Exchange Commission 
801 Brickell Avenue, Suite 1800 
Miami, FL  33131 

Frederick O. Kraus 
c/o Burton W. Wiand, Esq. 
Wiand Guerra King 
3000 Bayport Drive 
Tampa, FL  33607 

Burton W. Wiand, Esq. 
Wiand Guerra King 
3000 Bayport Drive 
Tampa, FL  33607 

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