Shamrock Partners, Ltd., James T. Kelly, John R. Doyle, and Steven J. Fischer
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE
COMMISSION
SECURITIES ACT OF 1933
Release No. 7971 / April 18, 2001
SECURITIES EXCHANGE ACT OF 1934
Release No. 44195 / April 18, 2001
ADMINISTRATIVE PROCEEDING
File No. 3-10344
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In the Matter of SHAMROCK PARTNERS, LTD., Respondents.
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ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND CEASE-AND- DESIST ORDER AGAINST RESPONENTS SHAMROCK PARTNERS, LTD., JAMES T. KELLY AND JOHN R. DOYLE |
I.
On October 10, 2000, the Securities and Exchange Commission ("Commission") instituted this administrative proceeding and cease-and-desist proceeding pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b)(6), 19(h), and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Shamrock Partners, Ltd. ("ROCK"), James T. Kelly ("Kelly") and John R. Doyle ("Doyle").
II.
ROCK, Kelly and Doyle have each submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except that they admit the jurisdiction of the Commission over them and over the subject matter of this proceeding, ROCK, Kelly and Doyle consent to the entry of the findings, and remedial sanctions and cease-and-desist order set forth below.
III.
The Commission finds that:1
THE SETTLING RESPONDENTS
A. ROCK has been registered with the Commission as a broker-dealer since January 1989 (File No. 8-40676). ROCK is based in Media, Pennsylvania.
B. Kelly is the owner and president of ROCK and resides in Newtown Square, Pennsylvania. During 1995, he had supervisory responsibilities for all of ROCK's operations. Kelly holds series 7 (general securities license), 24 (supervisor license), 55 (equity traders license) and 63 (state securities license) licenses. In 1998, the Commission found that ROCK and Kelly violated the NASD's Rules of Fair Practice by charging ROCK's customers excessive markdowns. In re Shamrock Partners Ltd. and James T. Kelly, Admin. Proc. File 3-9389 (November 12, 1998).
C. Doyle, since June 1989, has been associated with ROCK and currently resides in Malvern, Pennsylvania. During 1995, he was a securities trader for ROCK. Doyle holds series 4 (options supervisory license), 7 (general securities license), 24 (supervisor license), 55 (equity traders license) and 63 (state securities license) licenses. One of the securities that Doyle traded for ROCK, as a market maker, was The L.L. Knickerbocker Co., Inc. ("KNIC").
RELATED PARTIES
D. Respondent Stephen Fischer ("Fischer"), during 1995, was employed as a securities trader with a brokerage firm (the "Second Brokerage Firm"), which was formerly registered (and is now defunct). Fischer resides in Los Angeles, California. During 1995, Fischer held series 7 (general securities license) and 63 (state securities license) licenses.
E. KNIC is a California corporation based in Lake Forest, California. It is primarily engaged in celebrity-endorsed marketing and other ventures. In January 1995, KNIC sold approximately 943,000 common shares in an initial public offering. Subsequently, KNIC's stock traded on the Nasdaq Small-Cap stock system until August 1, 1995, when it became a Nasdaq-National Market System stock. Between July 3 and August 11, 1995, KNIC's stock price increased more than eightfold, from $6 to $52 per share. Shortly thereafter, KNIC's price dropped 38% to $32.50 per share. On August 25, 1999, the NASD delisted KNIC's stock, and three KNIC creditors filed a petition to liquidate the company.
F. From October 1994 to December 1996, Rafi Khan ("Khan") was a registered representative who operated a one-person branch office of ROCK from his home located in Los Angeles, California. As described below, ROCK, headquartered in Media, Pennsylvania, failed reasonably to supervise Khan. Khan recommended KNIC to his clients and others from approximately July 3, 1995 through August 30, 1995. On April 17, 2000, Khan consented to an injunction permanently enjoining him from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. SEC v. Rafi M. Khan et al., Civil Action No. 98-6143 MMM (SHx) (C.D. Cal.). In September 1999, Khan pleaded guilty to one felony count of filing a false tax return. U.S. v. Rafi Khan, CR 99-680 (LGB) (C.D. Cal).
BACKGROUND
G. From approximately July 3 to August 30, 1995 (the "Relevant Period"), Khan created an artificial market for KNIC stock by using a variety of fraudulent and deceptive acts which: (a) restricted the supply of stock; (b) stimulated demand for the stock; or (c) set artificial price levels for the stock. These acts included, among other things:
1. acquiring substantial control of the supply of KNIC stock (i.e., the "float");
2. purchasing shares to stabilize prices;
3. executing unauthorized trades;
4. parking stock;
5. discouraging sales;
6. making materially misleading statements;
7. publishing wildly exaggerated earnings and price projections;
8. promoting a short squeeze scheme;
9. selling at or below market prices;
10. establishing price domination; and
11. engaging in trading collusion.
H. During the Relevant Period, ROCK and the Second Brokerage Firm (which employed Fischer as its securities trader in KNIC) were two of the most active market makers in KNIC stock. For example, both firms either shared or were the exclusive "inside bid" (i.e., the highest price a market maker is willing to pay for stock) in KNIC stock. Additionally, the Second Brokerage Firm agreed to trade and purchase KNIC shares for ROCK. During the Relevant Period, Khan told the Second Brokerage Firm the quantity of shares to purchase and sell, and how high to raise its offer to buy (i.e., bid price) and offer to sell (i.e., ask price). In effect, Khan directed the Second Brokerage Firm's market-making activities in KNIC stock.
ROCK AND KELLY FAILED REASONABLY TO SUPERVISE KHAN
I. While associated with ROCK, Khan worked from his Southern California home. ROCK designated Khan's home as a one-person branch office. To effect trades, Khan communicated orders to ROCK's main office outside Philadelphia, some 3,000 miles from Khan.
J. ROCK failed to establish procedures or a system for applying such procedures, reasonably expected to prevent and detect violations of the federal securities laws. Kelly, as ROCK's president, was responsible for his firm's lack of adequate policies and procedures. In addition, ROCK and Kelly failed reasonably to discharge their supervisory duties and obligations. Specifically, ROCK and Kelly failed reasonably to supervise Khan, with a view to preventing Khan's violations of the federal securities laws as set forth in Paragraph III.F. through H. above and III.L. below. For example, ROCK and Kelly failed to investigate Khan's activities in light of obvious "red flags," including Khan's prior controversial stock promotions, KNIC's six-week price increase from $6 to $52, Khan's large purchases of KNIC stock for his clients' and relatives' accounts and several large cancellations and rebills of KNIC trades in Khan's accounts effected through ROCK's main office.
K. For the reasons stated above, ROCK and Kelly failed reasonably to supervise Khan within the meaning of Section 15(b)(4)(E) of the Exchange Act with a view to preventing Khan's violations of the Securities Act and Exchange Act.
DOYLE CAUSED ROCK TO MAKE, AND ROCK MADE, FICTITIOUS PRICE QUOTATIONS FOR KNIC STOCK
L. From July 3 to August 30, 1995, Khan used Doyle to direct ROCK's trades of KNIC stock. Khan told Doyle the quantity of shares to purchase and sell, and how high to raise ROCK's bid and offer. Khan told Doyle that the Second Brokerage Firm was purchasing KNIC shares for ROCK. Khan then directed Doyle to purchase those KNIC shares from the Second Brokerage Firm. In addition, Doyle told the Second Brokerage Firm how high to raise its purchase price for KNIC, furthering the collusive relationship between the Second Brokerage Firm and ROCK, two supposedly competing market makers.
M. ROCK willfully violated, and Doyle willfully aided and abetted and caused ROCK's violations of Section 15(c)(2) of the Exchange Act and Rule 15c2-7 thereunder by causing ROCK to submit quotations to the Nasdaq Small-cap stock system without disclosing that such quotations were submitted pursuant to an agreement with a second broker-dealer firm.
IV.
Based upon the foregoing, the Commission deems it appropriate in the public interest and for the protection of investors to impose the sanctions specified in ROCK's, Kelly's and Doyle's Offers.
Accordingly, IT IS HEREBY ORDERED that:
A. ROCK:
1. is censured;
2. shall cease and desist from committing or causing any violation and any future violation of Section 15(c)(2) of the Exchange Act and Rule 15c2-7 thereunder;
3. shall pay a civil money penalty in the amount of $50,000 to the United States Treasury. The $50,000 payment is due within 30 days after the issuance of this Order. 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) transmitted to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Virginia 22312-0003; and (D) submitted under a cover letter that identifies ROCK as a Respondent in these proceedings, and sets forth the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to David M. Rosen, Senior Counsel, Pacific Regional Office, Securities and Exchange Commission, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and
4. shall comply with the following undertakings:
a. To retain, within 30 days of the date of this Order, at its expense, an Independent Consultant, not unacceptable to the Commission's staff. The Independent Consultant shall conduct a review of ROCK's supervisory and compliance policies with respect to:
(1) the overall supervision of ROCK's branch offices, including the nature and frequency of inspections and the review of correspondence and sales literature sent to ROCK's clients;
(2) the training given to, and responsibilities of, employees who supervise the day-to-day activities at ROCK's branch office;
(3) the compensation paid to ROCK's registered representatives involved in securities transactions in which ROCK acts as a market maker;
(4) sales practices used to sell securities to customers;
(5) what role, if any, the registered representative has in directing ROCK's market making activities; and
(6) recommending such other policies or procedures (or amendments to existing policies and procedures) as are reasonably expected to prevent and detect the types of violations of the federal securities laws involving Kelly's and Khan's actions described in Section III.;
b. At the end of that review, which in no event shall be more than 4 months after the date of the issuance of this Order, the Independent Consultant shall submit to ROCK and to the Commission's Pacific Regional Office an Initial Report. The Initial Report shall describe the review performed, the conclusions reached and shall include any recommendations deemed necessary to make the policies, procedures and systems of supervision adequate. ROCK may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the Independent Consultant. The Independent Consultant shall evaluate ROCK's proposed alternative procedure. However, ROCK shall abide by the Independent Consultant's final recommendation;
c. Within 9 months of the date of this Order, ROCK shall in writing advise the Independent Consultant and the Commission's Pacific Regional Office of the recommendations it is adopting;
d. Within 11 months of the date of this Order, the Independent Consultant shall complete its review and submit a written final report to ROCK and the Commission's Pacific Regional Office. The Final Report shall: describe the review made of ROCK's supervisory functions, compliance mechanisms, and other policies and procedures; set forth conclusions and recommendations and any proposals by ROCK; and describe how ROCK is implementing those recommendations and proposals;
e. ROCK shall take all necessary and appropriate steps to adopt and implement all recommendations contained in the Independent Consultant's Final Report;
f. No later than six months after the date of the Independent Consultant's final report, ROCK shall submit to the Commission's Pacific Regional Office an affidavit setting forth the details of its efforts to implement the Independent Consultant's recommendations as set forth in the Final Report and its compliance with them;
g. For good cause shown and upon timely application by the Independent Consultant or ROCK, the Commission's staff may extend any of the deadlines set forth in these undertakings; and
h. For the period of engagement and for a period of two years from the completion of the engagement, ROCK shall not enter into any employment, consultant, attorney-client, auditing, or other professional relationship, whether directly or through its affiliates, directors, officers, or agents, with the Independent Consultant or with any person engaged to assist the Independent Consultant in the performance of duties under this Order;
B. Kelly:
1. is suspended from acting in a supervisory capacity with any broker or dealer for a period of six months, effective beginning the second Monday following the issuance of this Order, provided that, upon completion of the suspension, he provides the Pacific Regional Office with an affidavit that he has complied with the terms of the suspension; and
2. shall pay a civil money penalty in the amount of $25,000 to the United States Treasury. The $25,000 payment is due within 30 days after the issuance of this Order. 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) transmitted to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Virginia 22312-0003; and (D) submitted under a cover letter that identifies Kelly as a Respondent in these proceedings and sets forth the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to David M. Rosen, Senior Counsel, Pacific Regional Office, Securities and Exchange Commission, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and
C. Doyle:
1. is suspended from associating with any broker or dealer for a period of three months, effective beginning the second Monday following the issuance of this Order, provided that, upon completion of the suspension, he provides the Pacific Regional Office with an affidavit that he has complied with the terms of the suspension;
2. shall cease and desist from causing any violation and any future violation of Section 15(c)(2) of the Exchange Act and Rule 15c2-7 thereunder; and
3. shall pay a civil money penalty in the amount of $5,000 to the United States Treasury. The $5,000 payment is due within 30 days after the issuance of this Order. 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) transmitted to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Virginia 22312-0003; and (D) submitted under a cover letter that identifies Doyle as a Respondent in these proceedings, and sets forth the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to David M. Rosen, Senior Counsel, Pacific Regional Office, Securities and Exchange Commission, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 The findings herein are made pursuant to the Offers of Settlement of Respondents ROCK, Kelly and Doyle and are not binding on any other person or entity in this or any other proceeding.