UNITED STATES OF AMERICA
SECURITIES ACT OF 1933
SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate in the public interest and for the protection of investors to institute administrative and cease-and-desist proceedings 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") against Weber Investment Corporation ("WIC").
In anticipation of the institution of these proceedings, WIC submitted an Offer of Settlement to the Commission, 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 in which the Commission is a party, without admitting or denying the findings, except the jurisdiction of the Commission over it and the matters set forth in this Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b), 19(h) and 21C of the Securities Act of 1934, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order, ("Order") which WIC admits, WIC consents to the institution of administrative and cease-and-desist proceedings and to the entry of the findings set forth below.
Accordingly, IT IS ORDERED that administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h) and 21C of the Exchange Act be, and hereby are, instituted.
On the basis of this Order and the Offer submitted by WIC, the Commission finds that1:
A. WIC is a broker-dealer registered with the Commission pursuant to Section 15 of the Exchange Act since 1991.
B. Terry Don Rader ("Rader"), a resident of Dallas, Texas, was the president, chief financial officer, compliance officer and financial and operations principal for WIC from 1991 until his termination on October 31, 1997. Rader was responsible for all aspects of WIC's operations.
C. In May 1991, WIC entered into a Fully Disclosed Correspondent Agreement (the "Agreement") with Southwest Securities, Inc. ("Southwest") wherein Southwest agreed to perform all back office functions for WIC, including clearing services, maintaining client accounts, and providing margin lending services. Generally, margin adjustments were made on a daily basis by Southwest and inventory accounts were marked-to-market on the last trade date at the end of each month. Pursuant to the Agreement, Southwest required that excess collateral be refunded or additional collateral be furnished as a result of changes in the market value of the securities held by WIC. Southwest allowed its correspondent broker-dealers, including WIC, to input the price used by Southwest to adjust the value of securities held in inventory for margin adjustments.
D. WIC maintained a number of accounts at Southwest, including one in which index options (the "Options account") were traded on behalf of the firm; Rader controlled this account and the activity within it. From January 1, 1997, to October 31, 1997, Rader experienced trading losses in the Options account totaling nearly $1 million.
E. In addition to the Options account, Rader also maintained three firm inventory accounts. Two of the accounts were reflected in WIC's books and records; however, the third account was not reflected in the firm's records. Rader used these inventory accounts to cover his losses in the Options account and to provide funds for his personal use. Rader also transferred securities between the inventory accounts and related-customer/fictitious accounts controlled by him at inflated values. The monies were then used to avoid margin calls in the inventory accounts, reduce Options account losses and/or for his personal use. In total, Rader created false profits of approximately $2.4 million.
F. On a daily basis, from at least November 1995 through October 28, 1997, Rader manually entered inflated prices for securities in his inventory accounts by accessing software provided by Southwest. In order to cover the continuing losses in the Options account and to make up for the transfers of funds out of the inventory accounts, Rader had to continually increase the per share price of the securities of the inventory accounts. Rader was then able to keep up the appearance of a profitable inventory and avoid margin calls.
G. On October 30, 1997, Rader admitted to inflating the prices of securities held in WIC inventory accounts to hide the extensive losses he had incurred in Options account.
H. Rader, who controlled WIC's books and records, also failed to prepare and maintain accurate books and records for WIC. For instance, Rader destroyed records pertaining to one of the inventory accounts, and the activity in that account was not reflected in WIC's records. Further, all positions held in Rader's three inventory accounts were overpriced. In addition, WIC's 1997 general ledger inaccurately reflected numerous deposits and withdrawals from the Southwest clearing deposit account. Also, WIC's general ledger balances for the months ending June and July 1997 were incorrect.
I. An NASDR examination of WIC conducted in November 1997 revealed that, as of September 29, 1997, WIC had a net capital deficit of $62,553. This deficiency was caused by a number of customer checks improperly made payable to WIC instead of Southwest. The result of the payments to WIC was to increase WIC's net capital requirements. Rader, who was responsible for all aspects of the firm's supervisory procedures, failed to follow the firm's written supervisory procedures requiring that customer checks be payable to the clearing firm and not WIC.
J. Based on the above conduct, WIC willfully violated Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, and 17a-4 thereunder.
K. In determining to accept the Offer, the Commission considered cooperation afforded the Commission staff.
In view of the foregoing, the Commission deems it appropriate in the public interest and for the protection of investors to impose the sanctions set forth in the Offer submitted by WIC.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h) and 21C of the Exchange Act, that:
A. WIC cease and desist from committing or causing any violations, or any future violations, of Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, and 17a-4 thereunder; and
B. WIC be, and hereby is, censured.
By the Commission.
1 The findings herein are made pursuant to WIC's Offer and are not binding on any other person or entity in these or any other proceedings.