UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7683 / May 13, 1999 SECURITIES EXCHANGE ACT OF 1934 Release No. 41399 / May 13, 1999 ADMINISTRATIVE PROCEEDING File No. 3-9369 : In the Matter of : : Order Making Findings Dominion Capital : and Imposing Remedial Corporation, Douglas : Sanctions, and Order to Woodrow Powell, Charles : Cease and Desist Dewey Elliott, and : William Carl Berry, : : Respondents : : I. In these proceedings instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Respondents Dominion Capital Corporation, Douglas Woodrow Powell, Charles Dewey Elliott and William Carl Berry, pursuant to Rule 240 of the Rules of Practice of the Securities and Exchange Commission, have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. [1] Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.100 et seq., and, without admitting or denying the findings contained herein, except those contained in Section II below, and the jurisdiction of the Commission over them in this matter, which are admitted, Respondents consent to the issuance of this Order Making Findings and Imposing Remedial Sanctions, and Order to Cease and Desist ("Order"). On the basis of Respondents' Offers and this Order, the Commission finds as follows: II. THE RESPONDENTS A. Dominion Capital Corporation ("Dominion") is a broker and dealer in securities located in Dallas, Texas that has been registered with the Commission since 1987. Dominion ceased operations in 1998. B. William Carl Berry ("Berry") has been a registered representative of Dominion since May 1994, and has been employed in the securities industry since 1987. C. Douglas Woodrow Powell ("Powell") owns approximately 43% of Dominion's shares; has been Dominion's Chief Executive Officer since 1986; and during all relevant times has been Dominion's Chief Supervisory Officer. D. Charles Dewey Elliott, III ("Elliott") owns approximately 43% of Dominion's shares; has been Dominion's President since 1986; and during all relevant times was Dominion's Options Principal and Assistant Supervisory Officer. III. VIOLATIONS OF THE FEDERAL SECURITIES LAWS BY BERRY AND OTHERS From approximately May 1993 through December 1994, Berry and two other Dominion registered representatives willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder. One of the schemes, organized and promoted by Berry and another Dominion representative as partners, involved offers and sales of limited partnership interests in two limited partnerships formed to engage in index option trading. Another scheme, involving Dominion-sponsored offers and sales of unregistered interests in four Limited Liability Companies ("LLCs"), involved Berry's partner and a third representative. Separately, from November 1991 to January 1996, two other Dominion representatives willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in a scheme involving offers and sales of unregistered interests in an unregistered "offshore" investment company. One of these representatives was also registered with the Commission as an investment adviser, and, by his activities in furtherance of the "offshore" investment company scheme, willfully violated Sections 204, 206(1), 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 ("Advisers Act"), and Rules 204-1, 204-2, 204-3, and 206(4)-2 thereunder. A. BERRY'S CONDUCT 1. Berry and another Dominion representative developed a computer program to trade index options. To raise money to trade these index options, Berry and the other representative sold limited partnership interests ("units") in two limited partnerships, Options Trading Management Ltd. I ("Options I") and Options Trading Management Ltd. II ("Options II"), to their customers. Neither Berry nor the other representative had sufficient prior experience in options trading to competently conduct Options I or Options II business; both, however, touted the efficacy of the computer trading program to investors. The other representative was President and Director of the corporate general partner of Options I and was responsible for all its trading decisions. Berry was the President and Director of the corporate general partner of Options II and was responsible for all its trading decisions. 2. Between February and April 1994, Berry and the other representative raised $315,000 from 33 investors selling units in Options I. Subsequently, from September 1994 to December 1994, Berry and the other representative raised $165,000 from 20 investors selling units in Options II. As discussed below, several Options I investors also invested in Options II. Both Options I and Options II, as well as other trading accounts reliant upon the computer trading program, were unsuccessful and lost nearly all the customers' invested funds. In the offer and sale of units in Options I and Options II, Berry and the other representative willfully violated Section 17(a) of the Securities Act. In connection with purchases and sales of units in Options I and Options II, Berry and the other representative willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. As part of Berry's and the other representative's conduct, they made false, misleading or incomplete statements of material fact, including the following: a. The other representative sent to Options I investors account statements that contained profit calculations Berry prepared, which were based upon data supplied by the other representative. These calculations falsely reflected trading profits, rather than the losses actually incurred in the Options I trading account. Berry and the other representative subsequently sold limited partnership interests in Options II to Options I investors, without disclosing that the trading profits claimed in the Options I account statements were false, and without otherwise disclosing that Options I had experienced catastrophic trading losses. b. Berry represented to at least one Options II investor that Options I was performing well, when in fact it had experienced catastrophic trading losses. c. Berry failed to disclose to Options II investors that other accounts trading options utilizing the Options I and Options II computer trading program suffered near-total losses of principal. B. OTHER REPRESENTATIVES' CONDUCT Offers and Sales of Interests in LLCs 1. A Dominion registered representative engaged in "bait and switch" advertising in order to identify and obtain new customers. This representative placed advertisements offering "certificates of deposits" paying significantly higher rates of interest than available from banks. Upon being contacted by potential investors, he then "pitched" high-risk, illiquid, unsuitable investments, which paid him high commissions; many succumbed to the "pitch." From May 1993 to December 1993, this representative sold 49 customers $1.8 million in unregistered, illiquid and high-risk "preferred" interests in LLCs that were to construct and operate retail candy stores. Nearly all of the customers were retired, and 18 customers were 70 years of age or older. As a result of the representative's recommendations, some customers invested over 50% of their net worth in such investments. During this same period, another Dominion registered representative sold 19 customers $580,566 in unregistered, illiquid and high-risk "preferred" interests in these same LLCs. Of these customers, 14 were retired and 11 were 70 years of age or older. As a result of this registered representative's recommendations, several customers invested over 90% of their net worth in such investments. 2. These two representatives' activities in offering and selling LLC interests constituted willful violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. As part of the representatives' conduct, they made false, misleading or incomplete statements of material fact, including the following: a. Several customers were not provided with offering memoranda, and the representatives did not disclose that the interests were high-risk or unsuitable to the customer's stated investment objectives. When the representatives did provide these offering memoranda, they typically did so during the course of a sales presentation, which closed with the purchase of an LLC interest. In this way, investors were deprived of any meaningful opportunity to review the LLC offering materials. b. Customers were not told that the promised monthly distribution payments to investors, totaling 12% per annum, were wholly reliant upon the ability of the new stores to generate profits. Additionally, the representatives never told customers that related LLCs had experienced operating losses during the preceding year. c. The LLCs, in recognition of the high-risk, illiquid nature of their securities, required that a prospective investor have a minimum net worth prior to accepting his subscription. Furthermore, the LLCs utilized prospective investors' net worth information to assure compliance with applicable securities registration exemptions that limited the number of non-accredited investors permitted for each LLC. The representatives submitted false, inflated statements of customers' net worth on new account forms and subscription agreements to Dominion and the LLCs, in order to qualify numerous customers to purchase these LLC interests. Moreover, the false, inflated statements of customers' net worth concealed from certain of the LLCs that more than 35 non-accredited investors had purchased interests in their offerings. Offers and Sales of Unregistered Interests in the Unregistered Offshore Investment Company 3. Between November 1991 and January 1996, two other representatives, one of whom was also a registered investment adviser, sold to over 100 Dominion customers nearly $5 million in unregistered shares or interests in an unregistered "offshore" investment company they operated and controlled. By engaging in these activities, both representatives willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Furthermore, the representative who was also a registered investment adviser also willfully violated Sections 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rules 204-1, 204-2, 204-3, and 206(4)-2 thereunder. As part of the representatives' conduct, they made false, misleading or incomplete statements of material fact, including the following: a. The representatives misrepresented the past returns on the putative investment company's portfolios, both orally and in correspondence with its investors. b. The representatives failed to identify or state the location of securities comprising the putative investment company's portfolios, and failed to disclose that client funds had been invested in unidentified "offshore investments," subject to these representatives' exclusive control, both orally and in correspondence with investors, and in account statements provided by Dominion or its clearing broker. c. The representatives misrepresented or failed to state the remuneration paid to each of them from investors' funds. C. FAILURE TO SUPERVISE During the period set forth above, Dominion and Powell failed reasonably to supervise the registered representatives whose activities are described above, all persons subject to their supervision, with a view toward preventing willful violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Also during this period, Elliott failed reasonably to supervise these registered representatives, with the exception of the registered representative who participated in the offer and sale of unregistered interests in the unregistered investment company, and who was not also registered as an investment adviser, all of whom were subject to Elliott's supervision, with a view toward preventing willful violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Dominion, Powell and Elliott all failed reasonably to supervise the registered representative who was also a registered investment adviser, with a view toward preventing his willful violations of Sections 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rules 204-1, 204-2, 204-3, and 206(4)-2 thereunder. These failures include the following: Dominion 1. Dominion's Written Supervisory Procedures ("WSP"), and its system for applying such procedures, were insufficient to detect and prevent fraudulent activity by the firm's representatives, including the representatives whose activities are described above, as follows: a. The system for applying the WSP required Powell or Elliott to directly supervise over 100 representatives, most of whom were independent contractors who maintained off-site offices, often in different cities, and who conducted and handled their own correspondence with customers. The WSP failed to establish adequate procedures for monitoring the sales practices of these representatives. b. The WSP failed to provide adequate procedures for supervisors to monitor the suitability of securities for purchase by Dominion's customers. Powell 2. Powell failed to adequately discharge direct supervisory responsibility as required by Dominion's WSP. As the firm's Chief Supervisory Officer, Powell was responsible for virtually all compliance functions, other than those relating to option transactions, including supervision of the representatives whose activities are described herein. Powell was aware, or should have been aware, of these representatives' violative activities, but did not act to detect or prevent such activities. Powell's supervisory failures include the following: a. Powell failed to periodically, and at least annually, review all customer accounts to detect and prevent violations of, and to ensure compliance with, applicable laws, regulations and rules, as required by Dominion's WSP. b. Powell failed to properly review the financial statements purportedly provided by the firm's customers, and thus failed to detect the false financial information submitted by registered representatives on new account forms and subscription agreements, notwithstanding the fact that the reported net worth of several retired or unemployed customers increased markedly and quickly, and without explanation, and that he was aware the LLCs would accept subscriptions from only a limited number of non-accredited investors. c. Powell failed to properly monitor representatives' sales presentations, or their compliance with offering memoranda delivery requirements, or to detect numerous sales of high- risk, illiquid securities, which were unsuitable for certain customers and inconsistent with customers' stated investment objectives. d. Powell failed to properly monitor or impose restrictions on registered representatives who were the subject of customer complaints. e. Powell failed to properly monitor out-going correspondence in connection with Options I or the unregistered "offshore" investment company, and failed to review the performance of Options I or the accounts of other Dominion customers utilizing the same computer trading program prior to approving the sale of units in Options II. f. Powell permitted two Dominion representatives to offer and sell unregistered interests in the unregistered "offshore" investment company, which was not a Dominion- approved investment, by use of an offering memorandum, correspondence (including account statements provided by Dominion or its clearing broker), and oral presentations that misrepresented or failed to disclose material information concerning, among other things, the following: The past returns on the putative investment company's portfolios; the identity or location of securities comprising the putative investment company's portfolios, and that client funds were invested in "offshore investments" subject to the representatives' exclusive control; and the remuneration paid to the representatives from investors' funds. Elliott 3. Elliott failed to adequately discharge direct supervisory responsibility as required by Dominion's WSP. As the firm's Assistant Supervisory Officer and Options Principal, Elliott was responsible for all compliance functions in Powell's absence, and was responsible for all options compliance functions, which responsibilities included supervision of the representatives whose activities are described herein. Elliott was aware, or should have been aware, of these representatives' violative activities, but did not act to detect or prevent such activities. Elliott's supervisory failures include the following: a. Elliott failed to properly review the financial statements purportedly provided by the firm's customers, and thus failed to detect the false financial information submitted by registered representatives on new account forms and subscription agreements, notwithstanding the fact that the reported net worth of several retired or unemployed customers increased markedly and quickly, and without explanation, and that he was aware the LLCs would accept subscriptions from only a limited number of non-accredited investors. b. Elliott failed to properly monitor representatives' sales presentations, or their compliance with offering memoranda delivery requirements, or to detect numerous sales of high- risk, illiquid securities, which were unsuitable for certain customers and inconsistent with customers' stated investment objectives. c. Elliott allowed correspondence containing false and misleading information concerning the profitability of trading in Options I to be sent to investors. d. Elliott failed to monitor or place restrictions on options trading activities by Berry and another representative, when he was aware, or should have been aware, of the following: (1) that correspondence sent to investors concerning Options I contained false statements of trading profits; (2) that every account traded with the options trading computer program, including Options I and Options II, resulted in near-complete losses of principal by investors; and (3) that neither Berry nor the other representative had adequate experience in options transactions. e. Elliott failed to properly monitor out-going correspondence and Dominion account statements concerning the unregistered "offshore" investment company. f. Elliott permitted two Dominion representatives to offer and sell unregistered interests in the unregistered "offshore" investment company, which was not a Dominion- approved investment, by use of an offering memorandum, correspondence (including account statements provided by Dominion or its clearing broker), and oral presentations that misrepresented or failed to disclose material information concerning, among other things, the following: The past returns on the putative investment company's portfolios; the identity or location of securities comprising the putative investment company's portfolios, and that client funds were invested in "offshore investments" subject to the representatives' exclusive control; and the remuneration paid to the representatives from investors' funds. D. FAILURE TO MAINTAIN BOOKS AND RECORDS During the period set forth above, Dominion willfully violated Section 17(a) of the Exchange Act and Rule 17a-3(a)(6) thereunder by failing to make and keep current books and records. Dominion did not maintain accurate memoranda of orders and other instructions given or received for the purchase or sale of securities, as required by Rule 17a-3(a)(6). As discussed above, Dominion representatives, including Berry, knowingly obtained and prepared false customer financial information, which was incorporated in subscription agreements and new account forms relating to customers' purchases of interests in LLCs. Consequently, Dominion's records of these transactions were inaccurate. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions that are set forth in the Offers submitted by Respondents. Accordingly, IT IS ORDERED that: A. Dominion's registration as a broker and dealer in securities is hereby revoked. Furthermore, Dominion shall pay a civil money penalty of $75,000 to the United States Treasury within 90 days of the issuance of this Order. Such payment shall be: 1) made by United States postal money order, certified check, bank cashier's check or bank money order; 2) made payable to the Securities and Exchange Commission; 3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and 4) submitted under a cover letter that identifies Dominion as a respondent in these proceedings and states the file number of these proceedings, a copy of which, along with a copy of the money order or check, shall be sent to Harold F. Degenhardt, District Administrator, Fort Worth District Office, 801 Cherry Street, 19th Floor, Ft. Worth, TX 76102. B. Powell is hereby suspended from association with any broker or dealer, in any capacity for a period of three months, and, thereafter, in any supervisory or proprietary capacity for a period of an additional six months. Powell shall pay a civil money penalty of $35,000 to the United States Treasury within 90 days of the issuance of this Order. Such payment shall be: 1) made by United States postal money order, certified check, bank cashier's check or bank money order; 2) made payable to the Securities and Exchange Commission; 3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and 4) submitted under a cover letter that identifies Powell as a respondent in these proceedings and states the file number of these proceedings, a copy of which, along with a copy of the money order or check, shall be sent to Harold F. Degenhardt, District Administrator, Fort Worth District Office, 801 Cherry Street, 19th Floor, Ft. Worth, TX 76102. C. Elliott is hereby suspended from association with any broker or dealer, in any capacity for a period of three months, and, thereafter, in any supervisory or proprietary capacity for a period of an additional six months. Elliott shall pay a civil money penalty of $35,000 to the United States Treasury within 90 days of the issuance of this Order. Such payment shall be: 1) made by United States postal money order, certified check, bank cashier's check or bank money order; 2) made payable to the Securities and Exchange Commission; 3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and 4) submitted under a cover letter that identifies Elliott as a respondent in these proceedings and states the file number of these proceedings, a copy of which, along with a copy of the money order or check, shall be sent to Harold F. Degenhardt, District Administrator, Fort Worth District Office, 801 Cherry Street, 19th Floor, Ft. Worth, TX 76102. D. Berry is barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, and ordered to cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. E. Berry shall, within 90 days of the entry of this Order, pay a civil money penalty in the amount of $5,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Berry as a Respondent in these proceedings, and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Spencer C. Barasch, Assistant District Administrator, Fort Worth District Office, 801 Cherry Street, Suite 1900, Fort Worth, Texas 76102. F. Berry shall, within 90 days of the entry of this Order, pay disgorgement of $11,714.45 and prejudgment interest of $3,585.12 for a total amount of $15,299.57. Such payment shall be (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Berry as a Respondent in these proceedings, and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Spencer C. Barasch, Assistant District Administrator, Fort Worth District Office, 801 Cherry Street, Suite 1900, Fort Worth, Texas 76102. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: An Order Instituting Public Administrative and Cease-and- Desist Proceedings against Respondents was issued by the Commission on August 19, 1997.