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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before The
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 42375 / February 2, 2000

INVESTMENT ADVISERS ACT OF 1940
Release No. 1853 / February 2, 2000

ADMINISTRATIVE PROCEEDINGS
File No. 3-10136

In the Matter of

THOMAS J. PARKER and
JACK C. HERNDON, JR.,

Respondent.
 

ORDER INSTITUTING PUBLIC
PROCEEDINGS PURSUANT TO
SECTIONS 15(b)(6) AND 19(h) OF
THE SECURITIES EXCHANGE ACT
OF 1934 AND SECTION 203(f) OF THE
INVESTMENT ADVISERS 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 proceedings be instituted pursuant to Sections 15(b)(6) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") and Section 203(f) of the Investment Advisers Act of 1940 ("Advisers Act") against Thomas J. Parker ("Parker") and Jack C. Herndon, Jr. ("Herndon").

In anticipation of the institution of these proceedings, Parker and Herndon have each submitted an Offer of Settlement, which Offers 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, Parker and Herndon, by their respective Offers of Settlement, each admits the jurisdiction of the Commission over them and the subject matter of these administrative proceedings and each consents to the entry of this Order Instituting Public Proceedings Pursuant to Sections 15(b)(6) and 19(h) of the Securities Exchange Act of 1934 and 203(f) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions ("Order"), without admitting or denying the Commission's findings, except as for those contained in paragraphs III.A. and III.B. below, which are admitted.

II.

Accordingly, IT IS HEREBY ORDERED THAT proceedings pursuant to Sections 15(b)(6) and 19(h) of the Exchange Act and Section 203(f) of the Advisers Act be, and hereby are, instituted.

III.

On the basis of this Order and the Offers of Settlement by Parker and Herndon, the Commission makes the following findings:

BACKGROUND

A. Advanced Financial Planning Securities Corporation ("Advanced Financial") has been registered with the Commission as a broker-dealer since January 13, 1986, and as an investment adviser since July 11, 1986.

B. In 1994 and 1995, Advanced Financial was a wholly-owned subsidiary of Advanced Financial Planning Corporation, which in turn was wholly-owned by Parker, who was also one of Advanced Financial's principals. Herndon was both the president and compliance officer of Advanced Financial and a principal of the firm. The main office of Advanced Financial was located in Brentwood, Tennessee.

C. From 1988 until the time of his death on November 3, 1995, Joseph C. Taylor ("Taylor") was a registered representative in Knoxville, Tennessee, associated with Advanced Financial on an independent contractor basis. Parker and Herndon were both responsible for the supervision of Taylor within the meaning of Section 15(b)(4)(E) of the Exchange Act and Section 203(e)(6) of the Advisers Act. Under Taylor's agreement, Advanced Financial, acting at the direction of Parker and Herndon, could direct Taylor to cease or alter his securities-related selling activities at any time.

OVERVIEW

D. From approximately mid-1994 until his death, Taylor conducted a Ponzi scheme which defrauded investors out of millions of dollars. He solicited funds from investors by claiming to have produced large returns through investments in, among other things, municipal bonds, rare coins and initial public offerings of stock. None of these investments, which were fictitious, were made through Advanced Financial. Taylor paid some investors by transferring investors' funds to previous investors while keeping some for himself.

E. During the summer of 1995, a former employee of Taylor informed Employee Benefit Services, Inc. ("EBS"), an affiliate of Advanced Financial, that Taylor had given her values for investments on balance sheets he had prepared for clients while having no supporting documentation for some of these values. Parker and Herndon received this information but conducted an inadequate investigation of Taylor's activities by allowing him an unreasonably long amount of time to produce supporting documentation. They did not heighten their supervision of Taylor, who continued his scheme for several additional months prior to his death.

TAYLOR'S FRAUDULENT ACTIVITIES

F. In 1994, Taylor began conducting a Ponzi scheme, using a checking account in the name of Taylor & Associates, L.P. A certificate of limited partnership had been filed on behalf of Taylor & Associates, L.P. with the Secretary of State of the State of Tennessee, listing Taylor as the entity's general partner. From 1994 through November 1995, Taylor solicited millions of dollars from investors, most of whom lived in or around Knoxville, Tennessee.

G. Taylor solicited funds from his victims by offering to place their monies in a wide variety of investments, including Tennessee municipal bonds, rare coins, initial public offerings of stock, and limited partnerships. He promised high rates of return in short periods of time. Although some investors received cash "returns" on their investments, many investors allowed Taylor to reinvest their funds and believed the fictitious numbers he gave which purported to show the growth in their accounts. In truth, none of Taylor's purported deals or investments was genuine; instead, Taylor was simply paying off early investors with funds he solicited from later ones while keeping some monies to support his lifestyle.

H. By the acts described above, Taylor willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

I. In the Fall of 1995, Taylor began experiencing difficulty raising new funds to pay off his earlier victims, some of whom were demanding their money back. Taylor committed suicide on November 3, 1995.

PARKER AND HERNDON FAILED TO RESPOND ADEQUATELY TO A TIP ABOUT TAYLOR'S IMPROPRIETIES

J. In the summer of 1995, a former employee of Taylor sent to EBS a letter with attachments, including a series of investment balance sheets Taylor had prepared for and sent to several of his clients. Many of the persons or entities named in the letter and its attachments were either brokerage or investment advisory clients of Advanced Financial.

K. The former employee claimed that Taylor did not have supporting documentation or records to justify the values of certain investments listed on the balance sheets. Some of the investment balance sheets disclosed investments by clients in Taylor & Associates, L.P.

L. In addition, the former employee included information about Taylor's activities which had come to the attention of Parker and Herndon previously, in particular a series of checks between Taylor and one of his clients in 1993 and 1994, eighteen of which were each greater than $100,000. In response to the inquiries of Parker and Herndon, Taylor had supplied information about his arrangements with this client. Herndon attempted to verify Taylor's explanation by talking to a registered representative who also served that client, but did not talk to the client.

M. Parker and Herndon met with Taylor and his attorney on July 24, 1995. At this meeting, Taylor's attorney stated that he believed that Taylor need not supplement his description of outside business activities. In the course of discussing a variety of matters, Taylor explained that Taylor & Associates, L.P. was in fact a general partnership, despite its name, and that while he was a general partner, he was not the managing general partner. He explained that Taylor & Associates, L.P. was operated by another person. He said that he had repaid a loan from his client in full. The figures on the investment balance sheets, according to Taylor, had been supplied by the clients themselves after they had purchased the investments elsewhere. These explanations, however, were false.

N. Parker and Herndon asked for some additional supporting documentation for Taylor's explanations, but they did not contact any of the outside parties listed in the documents supplied by the former employee or mentioned by Taylor. They did not heighten their supervision of Taylor. Parker had known Taylor for over twenty years, and Taylor had never been the subject of a customer complaint or disciplinary action while associated with Advanced Financial.

O. Taylor supplied none of the supporting documentation requested by Parker and Herndon during August 1995. During August 1995, neither Parker nor Herndon contacted any of the investors listed in the documents supplied by Taylor's former employee. They also did not contact any other persons who could have commented on Taylor's explanations, nor did they increase their supervision of Taylor. Herndon did, however, conduct an on-site inspection of Taylor's customer files, and again requested that Taylor furnish the documentation he had agreed to supply.

P. In September 1995, Taylor also failed to supply any of the information requested by Parker and Herndon. During September 1995, neither Parker nor Herndon contacted any of the investors listed in the documents supplied by Taylor's former employee. They also did not contact any other persons who could have commented on Taylor's explanations, nor did they increase their supervision of Taylor.

Q. In October, Herndon sent a memorandum to Taylor reminding him of the information he had agreed to provide during the July meeting. Taylor indicated to Parker on October 12 that he was gathering the information, but he failed to supply any supporting information during that month. During October 1995, neither Parker nor Herndon contacted any of the investors listed in the documents supplied by Taylor's former employee. They also did not contact any other persons who could have commented on Taylor's explanations, nor did they increase their supervision of Taylor.

R. According to checking account records, from August through October 1995, Taylor raised $61.5 million from investors, distributing approximately the same amount as "returns."

PARKER AND HERNDON FAILED REASONABLY TO SUPERVISE TAYLOR WITH A VIEW TO PREVENTING VIOLATIONS OF THE FEDERAL SECURITIES LAWS

S. By the actions and omissions alleged in paragraphs III.A. through III.R. above, Parker and Herndon failed reasonably to supervise Taylor with a view to preventing his violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, pursuant to Section 15(b)(6) of the Exchange Act and within the meaning of Section 15(b)(4)(E) of the Exchange Act and pursuant to Section 203(f) of the Advisers Act and within the meaning of Section 203(e)(6) of the Advisers Act.

IV.

In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offers of Settlement of Parker and Herndon.

ACCORDINGLY, IT IS HEREBY ORDERED:

A. Regarding Parker:

1. That Parker be, and hereby is, censured;

2. That Parker shall, within 10 days following the issuance of this Order, pay a civil penalty pursuant to Section 21B of the Exchange Act and Section 203(i) of the Advisers Act to the United States Treasury in the amount of $10,000. The payment shall be (a) made by certified check, bank cashier's check, bank money order or United States postal order; (b) made payable to the Securities and Exchange Commission; (c) mailed or delivered to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under a cover letter identifying Parker as a respondent in these proceedings, and including the Commission's file number in these proceedings. A copy of the cover letter and money order or check shall be sent to Richard P. Wessel, District Administrator, Atlanta District Office, Securities and Exchange Commission, 3475 Lenox Road, N.E., Suite 1000, Atlanta, GA 30326;

3. That Parker be, and hereby is, suspended from association in a supervisory capacity with any broker, dealer or investment adviser for a period of six months, effective on the second Monday following the entry of this Order; and

4. That Parker shall, within ten days of the completion of the suspension described above, deliver an affidavit of compliance stating that he has complied with the terms of the suspension. The affidavit shall be sent to Richard P. Wessel, District Administrator, Atlanta District Office, Securities and Exchange Commission, 3475 Lenox Road, N.E., Suite 1000, Atlanta, GA 30326.

B. Regarding Herndon:

1. That Herndon be, and hereby is, censured;

2. That Herndon shall, with 10 days following the issuance of this Order, pay a civil penalty pursuant to Section 21B of the Exchange Act and Section 203(i) of the Advisers Act to the United States Treasury in the amount of $10,000. The payment shall be (a) made by certified check, bank cashier's check, bank money order or United States postal order; (b) made payable to the Securities and Exchange Commission; (c) mailed or delivered to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under a cover letter identifying Parker as a respondent in these proceedings, and including the Commission's file number in these proceedings. A copy of the cover letter and money order or check shall be sent to Richard P. Wessel, District Administrator, Atlanta District Office, Securities and Exchange Commission, 3475 Lenox Road, N.E., Suite 1000, Atlanta, GA 30326;

3. That Herndon be, and hereby is, suspended from association with any broker, dealer or investment adviser for one month, effective on the first Monday following the completion of Parker's suspension described in paragraph IV.A.3.;

4. That Herndon be, and hereby is, suspended from association in a supervisory capacity with any broker, dealer or investment adviser for a period of six months, effective immediately following the completion of his suspension described in paragraph IV.B.3.; and

5. That Herndon shall, within ten days of the completion of each of the periods of suspension described in paragraphs IV.B.3. and IV.B.4., deliver an affidavit of compliance stating that he has complied with the terms of the suspensions. The affidavits shall be sent to Richard P. Wessel, District Administrator, Atlanta District Office, Securities and Exchange Commission, 3475 Lenox Road, N.E., Suite 1000, Atlanta, GA 30326.

By the Commission.

Jonathan G. Katz
Secretary

http://www.sec.gov/litigation/admin/34-42375.htm


Modified:02/07/2000