U. S. Securities and Exchange Commission
Securities Act of 1933
Release No. 8261 / July 31, 2003
Securities Exchange Act of 1934
Release No. 48262 / July 31, 2003
Investment Advisers Act of 1940
Release No. 2154 / July 31, 2003
Investment Company Act of 1940
Release No. 26144 / July 31, 2003
File No. 3-11201
Administrative And Cease-And-Desist Proceedings Instituted Against Nevis Capital Management, LLC, David R. Wilmerding, III and Jon C. Baker In Connection With Their IPO Allocation Practices And Disclosures
The Securities and Exchange Commission ("Commission") has instituted public administrative and cease-and-desist proceedings against Nevis Capital Management, LLC ("Nevis Capital"), a registered investment adviser, its President, David R. Wilmerding, III ("Wilmerding") and its Executive Vice-President, Jon C. Baker ("Baker"), all of the Baltimore, Maryland area, for alleged violations of the antifraud and reporting provisions of the federal securities laws relating to their initial public offering ("IPO") allocation practices and disclosures. This matter, which arose from a routine regulatory examination, involves fraudulent and deceptive conduct by Nevis Capital, Wilmerding and Baker that served to benefit themselves, to the detriment of investors.
In the Order Instituting Public Administrative Proceedings Pursuant to Sections 203(e) and 203(f) of the Investment Advisers Act of 1940 and Section 9(b) of the Investment Company Act of 1940 and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940 and Section 9(f) of the Investment Company Act of 1940 ("Order"), the Division of Enforcement ("the Division") alleges that Nevis Capital, Wilmerding and Baker inequitably allocated IPO shares to only two of their approximately 105 clients. In particular, between December 1998 and December 1999, Nevis Capital purchased approximately 2,857,000 shares of 84 IPOs. Nevis Capital, through Wilmerding and Baker, allocated all of those IPO shares to only the Snowdon Limited Partnership ("Snowdon"), an unregistered investment company, and the Nevis Fund, a registered investment company, both of which had been formed by Nevis Capital. The Division alleges that these IPO shares had a significant impact on the performance of Snowdon and the Nevis Fund, which benefited those entities, and Nevis Capital, Wilmerding and Baker, at the expense of their other clients. The Division further alleges that Nevis Capital and Wilmerding made false statements and omitted material information from Nevis Capital's Form ADV amendment filed on January 28, 1999. In particular, they falsely stated in the Form ADV amendment that "all clients would be treated equally (on a pro-rata basis)", when they had an undisclosed policy to allocate IPO shares only to Snowdon and the Nevis Fund, and they also failed to disclose that they could earn greater fees if they allocated IPO shares only to Snowdon and the Nevis Fund rather than to their other clients. Unlike their other clients, Snowdon paid Nevis Capital a performance-based fee of 20% of profits and the Nevis Fund's strong performance attracted new investors, which increased the management fees paid by the Nevis Fund to Nevis Capital. In total, Nevis Capital received approximately $2,600,000 in fees as a result of its allocation of IPOs to Snowdon and the Nevis Fund.
In addition to the inequitable allocation of IPO shares, the Division alleges that between December 1998 and July 2000, Nevis Capital, Wilmerding and Baker made false and misleading statements and omitted material information in the Nevis Fund's prospectus, annual and semi-annual reports and advertisements regarding the reasons for the Nevis Fund's performance. By pumping IPOs into the Nevis Fund, it achieved exceptional cumulative returns of 90.1%, 154.6% and 286.5 % as of May 31, 1999, September 30, 1999 and December 31, 1999. The Division alleges that without the first-day gains on the IPO shares, the Nevis Fund's returns would have been approximately -5%, -3.6% and 41% during these same periods. In the Nevis Fund's prospectus, annual and semi-annual reports and advertisements, Nevis Capital, Wilmerding and Baker misrepresented the reasons for the Nevis Fund's performance claiming, among other things, that the Fund's returns were attributable to their long-term investment strategy. They failed to disclose that the Nevis Fund's performance was primarily attributable to IPO investments, and instead stated that the Fund had invested in only "a couple IPOs."
Based upon the above-described conduct, the Division alleges that Nevis Capital, Wilmerding and Baker, willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 34(b) of the Investment Company Act of 1940; Nevis Capital willfully violated and Wilmerding and Baker willfully aided and abetted and caused Nevis Capital's violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-1(a)(5) thereunder; and Nevis Capital and Wilmerding willfully violated Section 207 of the Advisers Act.
A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Nevis Capital, Wilmerding and Baker an opportunity to respond to the allegations against them, and to determine whether any remedial action should be ordered, and disgorgement and/or penalties imposed, by the Commission.