SECURITIES ACT OF 1933
Release No. 8298 / October 2, 2003
SECURITIES EXCHANGE ACT OF 1934
Release No. 48588 / October 2, 2003
INVESTMENT ADVISERS ACT OF 1940
Release No. 2180 / October 2, 2003
INVESTMENT COMPANY ACT OF 1940
Release No. 26201 / October 2, 2003
ADMINISTRATIVE PROCEEDING
File No. 3-11292
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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, SECTION 203(f) OF THE INVESTMENT ADVISERS ACT OF 1940, AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Section 203(f) of the Investment Advisers Act of 1940 ("Advisers Act"), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against Steven B. Markovitz ("Markovitz" or "Respondent").
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") 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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent 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, Section 203(f) of the Investment Advisers Act of 1940, and Sections 9(b) and 9(f) of the Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
Overview
A. This is a proceeding against Markovitz, a hedge fund trader at Millennium Partners, L.P. in New York who engaged in late trading of mutual fund shares. Late trading refers to the practice of placing orders to buy or sell mutual fund shares 4:00 p.m. Eastern Time ("ET") but receiving the price based upon the prior net asset value ("NAV") already determined as of 4:00 p.m. Late trading violates the federal securities laws concerning the price at which mutual fund shares must be bought or sold and defrauds innocent investors in those mutual funds by giving to the late trader an advantage not available to other investors. By virtue of his conduct, Markovitz violated and aided and abetted violations of the antifraud and mutual fund pricing provisions of the federal securities laws.
Respondent
B. Markovitz, age 41, resides in New York, New York. From 1999 to 2003, Markovitz was employed as a trader at a group of hedge funds and their investment advisory affiliates based in New York, referred to herein as Millennium. Markovitz holds a Series 7 license. During his employment at Millennium, Markovitz was associated with entities that provided investment advisory services to the hedge funds.
Background - Late Trading
C. Rule 22c-1(a) under the Investment Company Act requires registered open-end investment companies ("mutual funds"), persons designated in such issuers' prospectuses as authorized to consummate transactions in any such security, their principal underwriters, and dealers in the funds' securities, to sell and redeem fund shares at a price based on the current NAV next computed after receipt of an order to buy or redeem. Mutual funds generally determine the daily price of mutual fund shares as of 4:00 p.m. ET. In these circumstances, orders received before 4:00 p.m. must be executed at the price determined as of 4:00 p.m. that day. Orders received after 4:00 p.m. must be executed at the price determined as of 4:00 p.m. the next trading day. In addition, mutual fund prospectuses typically contain representations concerning the time as of which the NAV is set for purposes of determining the price at which shareholders may buy or redeem mutual fund shares.
D. "Late trading" refers to the practice of placing orders to buy or sell mutual fund shares after 4:00 p.m. ET, the time as of which mutual funds typically calculate their NAV, but receiving the price based on the prior NAV already determined as of 4:00 p.m. Late trading enables the trader to profit from market events that occur after 4:00 p.m. but that are not reflected in that day's price. In particular, the late trader obtains an advantage -- at the expense of the other shareholders of the mutual fund -- when he learns of information and is able to purchase (or sell) mutual fund shares at prices set before the information was available.
E. Permitting late trading violates Rule 22c-1(a) under the Investment Company Act and defrauds innocent investors in those mutual funds by giving to the late trader an advantage not available to other investors.
Markovitz Engaged in Late Trading
F. From 1999 to 2003, Markovitz was employed as a trader at Millennium and engaged in the short term trading of mutual fund shares.
G. During the period of his employment at Millennium, Markovitz engaged in late trading on behalf of Millennium on a regular basis through certain registered broker-dealers (the "Broker-Dealers"). The Broker-Dealers enabled and permitted Markovitz to communicate orders to purchase and sell mutual fund shares on behalf of Millennium after 4:00 p.m. ET, but obtain the price based on that day's NAV. In some cases, Markovitz would communicate proposed orders to the Broker-Dealers before 4:00 p.m. ET, and then confirm, alter or cancel the proposed orders after 4:00 p.m. ET. In other cases, Markovitz would communicate orders to the Broker-Dealers in the first instance after 4:00 p.m. ET.
H. Markovitz understood that by engaging in late trading he was obtaining an advantage not available to other investors.
Violations
I. As a result of the conduct described in paragraphs A. through H. above, Markovitz willfully violated Section 17(a) of the Securities Act in that he, by the use of the means of instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly, in the offer or sale of securities, employed devices, schemes or artifices to defraud; obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon purchasers or prospective purchases of such securities, as described above.
J. As a result of the conduct described in paragraphs A. through H. above, Markovitz willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that he, in connection with the purchase or sale of securities, directly or indirectly, by the use of the means or instrumentalities of interstate commerce, or of the mails, employed devices, schemes or artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon the purchasers of the securities, as described above.
K. As a result of the conduct described in paragraphs A. through H. above, Markovitz willfully aided and abetted and caused violations of Rule 22c-1(a) by certain mutual funds, persons designated in such issuers' prospectuses as authorized to consummate transactions in any such security, their principal underwriters, or dealers in the funds' securities, which requires such persons to sell and redeem fund shares at a price based on the current NAV next computed after receipt of an order to buy or redeem.
IV.
The Respondent's Offer does not include an agreement to pay disgorgement or penalties. The issue of disgorgement and penalties will be resolved at a later date. As a part of his offer of settlement of this matter, Respondent agrees that if Respondent fails to submit an offer of settlement with respect to disgorgement and penalties that is acceptable to the Commission, then the Commission may reopen this proceeding against the Respondent for the purpose of resolving the issue of disgorgement and penalties. If the Commission reopens this proceeding, Respondent agrees that he will not contest the findings of fact or law in this Order as a basis for any Commission determination to order disgorgement or penalties that may be appropriate and in the public interest.
V.
In view of the foregoing, the Commission deems it is appropriate and in the public interest to impose the sanctions specified in Respondent's Offer.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act and Section 9(f) of the Investment Company Act, that Respondent cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from causing any violations and any future violations of Rule 22c-1(a) under the Investment Company Act;
B. Pursuant to Section 203(f) of the Advisers Act and Section 9(b) of the Investment Company Act, that Respondent be, and hereby is barred from association with any investment adviser, and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and
C. Any reapplication for association by the Respondent will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.
By the Commission.Jonathan G. Katz
Secretary
1 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding.