SECURITIES ACT OF 1933
Release No. 8126 / September 3, 2002
SECURITIES EXCHANGE ACT OF 1934
Release No. 46449 / September 3, 2002
INVESTMENT ADVISERS ACT OF 1940
Release No. 2054 / September 3, 2002
ADMINISTRATIVE PROCEEDING
File No. 3-10883
In the Matter of HARVEY I. RUBINSTEIN, Respondent.
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ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, AND SECTIONS 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS, MONETARY PENALTIES, AND 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 instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Harvey I. Rubinstein.
In anticipation of the institution of these proceedings, Rubinstein has submitted an Offer of Settlement ("Offer"), which Offer the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, Rubinstein admits the jurisdiction of the Commission over him and the subject matter of these proceedings and consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934, and Sections 203(f) and 203(k) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions, Monetary Penalties, and Cease-and-Desist Order ("Order"), without admitting or denying the Commission's findings, except as for those contained in paragraph III.A below, which are admitted.
II.
Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Sections 203(f) and 203(k) of the Advisers Act be, and hereby are, instituted.
III.
On the basis of this Order and the Offer submitted by Rubinstein, the Commission makes the following findings:1
RESPONDENT
A. Rubinstein held the position of vice president and senior portfolio manager of a registered investment adviser from January 1995 to January 2000.
TRANSACTION OF ADJUSTED TRADING SCHEME
B. In March and April 1998, Rubinstein and a registered representative associated with a registered broker-dealer planned and transacted a series of adjusted trades in investment-grade corporate bonds between Rubinstein's investment adviser and the registered representative's broker-dealer. Adjusted trading is a fraudulent trading practice where a person sells a security at a price above the prevailing market price and purchases another security at a corresponding price above the prevailing market price to offset the overpayment in the first transaction. Here, Rubinstein and the registered representative fraudulently increased the assets of favored accounts managed by the investment adviser at the expense of disfavored accounts by trading certain bonds above their prevailing market prices.
C. On March 27, 1998, Rubinstein and the registered representative discussed the prices at which the investment adviser would sell the corporate bonds to the broker-dealer. Rubinstein and the registered representative knew that the prices they were discussing were above the prevailing market prices for these bonds.
D. On March 30, 1998, Rubinstein and the registered representative discussed how the investment adviser would reimburse the broker-dealer for the losses it would suffer by purchasing bonds at above their prevailing market prices. They contemplated that the investment adviser would buy different bonds from the broker-dealer at prices above the prevailing market prices.
E. On March 30 and 31, 1998, Rubinstein caused the investment adviser to sell $100 million of investment-grade corporate bonds to the registered representative's broker-dealer at prices negotiated by Rubinstein and the registered representative. These prices were above the prevailing market prices for the bonds. Rubinstein sold the bonds from the favored accounts.
F. On April 2 and 3, 1998, Rubinstein caused the investment adviser to repurchase the same corporate bonds from the broker-dealer at prices negotiated by Rubinstein and the registered representative. These prices were lower than the prices at which the investment adviser had sold the bonds to the broker-dealer.
G. As a result, the broker-dealer suffered losses by purchasing the corporate bonds from the investment adviser at prices above the prevailing market prices and selling the same bonds back to the investment adviser at lower prices.
H. To offset the broker-dealer's losses, on March 31, April 3, and April 6, 1998, Rubinstein caused the investment adviser to purchase $100 million of different investment-grade corporate bonds from the broker-dealer at prices negotiated by Rubinstein and the registered representative. These prices were above the prevailing market prices; Rubinstein and the registered representative were aware of this. Rubinstein purchased these bonds for and placed them in the disfavored accounts.
I. Rubinstein caused the disfavored accounts to suffer losses to pay for the gains he procured for the favored accounts by trading bonds above their prevailing market prices.
VIOLATIONS
J. Section 17(a) of the Securities Act makes it unlawful for any person in the offer or sale of any securities to: employ any device, scheme, or artifice to defraud; obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Adjusted trading is a violation of Section 17(a) of the Securities Act. Hanauer, Stern & Co., Securities Exchange Act Rel. No. 21313, 1984 SEC LEXIS 759 (Sept. 11, 1984); TransAmerican Securities, Inc., Securities Exchange Act Rel. No. 17063, 1980 SEC LEXIS 2353 (June 9, 1980).
K. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person in connection with the purchase or sale of any security to: employ any device, scheme or artifice to defraud; make any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. Adjusted trading is a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Id.
L. Sections 206(1) and 206(2) of the Advisers Act make it unlawful for an investment adviser to: employ any device, scheme, or artifice to defraud any client or prospective client; or engage in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client. Adjusted trading is a violation of Sections 206(1) and 206(2) of the Advisers Act, the wording and intent of which are drawn from Section 17(a) of the Securities Act and are directly parallel to Rule 10b-5. See Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979), affirmed, 450 U.S. 91 (1981); SEC v. Texas Gulf Sulphur, 258 F. Supp. 262, 278 (S.D.N.Y. 1966), affirmed in pertinent part and reversed in part, 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969).
M. Rubinstein willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and willfully aided and abetted and caused violations of Sections 206(1) and 206(2) of the Advisers Act by transacting the adjusted trades described above.
IV.
In view of the foregoing, the Commission deems it appropriate to accept Rubinstein's Offer of Settlement and to impose the sanctions specified therein.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Sections 203(f) and 203(k) of the Advisers Act that Rubinstein:
A. Be, and hereby is, barred from being associated with an investment adviser;
B. Pay a civil money penalty totaling $25,139.32, including post-judgment interest of $139.32, in accordance with the following schedule: (1) $12,500 within 10 days of the entry of this Order; (2) $4,236.66 within 120 days of the entry of this Order; (3) $4,213.44 within 240 days of the entry of this Order; and (4) $4,189.22 within 270 days of the entry of this Order. Each 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 cover letter that identifies Harvey I. Rubinstein as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Richard P. Murphy, Assistant District Administrator, Securities and Exchange Commission, Atlanta District Office, 3475 Lenox Road, N.E., Suite 1000, Atlanta, GA 30326-1232.
C. Cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 The findings herein are made pursuant to Rubinstein's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.