UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate that a public administrative proceeding be, and hereby is, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent JWGenesis Financial, Inc., formerly known as JW Charles Financial Services, Inc. ("JWCFS").
In anticipation of the institution of these administrative proceedings, the 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 in which the Commission is a party, and without admitting or denying the findings, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the "Order").
On the basis of this Order and the Respondent's Offer, the Commission makes the following findings:
This matter involves the failure by JWCFS timely to file a Schedule 13D and its subsequent failure to file required amendments to the Schedule 13D it ultimately did file. JWCFS's violations occurred in connection with its acquisition of approximately 25% of the outstanding common stock of The Americas Growth Fund ("AGRO") from December 1996 to June 1997.1 In failing to make the required filing and amendments thereto, JWCFS violated Section 13(d) of the Exchange Act, and violated Rules 13d-1 and 13d-2 thereunder.
JWGenesis Financial, Inc., which, as a result of a statutory share exchange under Florida law effected on June 12, 1998, in connection with the acquisition and combination of two separate businesses, is a wholly-owned subsidiary of JWGenesis Financial Corp. JW Genesis Financial Corp. is a public financial services holding company whose common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and trades on the American Stock Exchange. Before the statutory share exchange, JWGenesis Financial, Inc. had been the public company and its name was JWCharles Financial Services, Inc.2 During all times relevant hereto, JWGenesis Financial, Inc. was the sole shareholder of JWGenesis Clearing Corp. (formerly JWCC), a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act.3 JWCC was engaged primarily in securities brokerage, investment banking, and the execution of securities transactions.
C. Other Relevant Entities and Persons
JWCharles/CSG, at the times relevant hereto, was a trade name used by JWCFS to refer to three of its wholly-owned operating subsidiaries, each of which was a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act: JW Charles Securities Inc. ("JWCS"), a New York Stock Exchange member, JWCC, and Corporate Securities Group ("CSG"). These operating subsidiaries engaged primarily in securities brokerage, investment banking, and the execution of securities transactions. The trade name "JWCharles/CSG" was used primarily in connection with investment banking transactions in which all three subsidiaries were participants.
The Americas Growth Fund, Inc., during the relevant time, was a non-diversified, closed-end investment management company that elected to be regulated as a "business development company" under Section 54 of the Investment Company Act of 1940. During the relevant time, AGRO traded on the NASDAQ Small Cap market and was registered with the Commission pursuant to Section 12(g) of the Exchange Act. AGRO went public in 1994, with a $5 million common stock offering. JW Charles/CSG was the principal underwriter for that offering. In June 1997, JWCFS commenced a tender offer for all of the outstanding shares of AGRO common stock. As a result of that tender offer (which was consummated in September 1997) and a statutory short-form merger in December 1998, JWCFS currently owns all of the outstanding shares of AGRO common stock.
1. JWCFS's Relationship with AGRO and Its Acquisition of Over Twenty-Five Percent of the Outstanding AGRO Common Stock
JWCFS's relationship with AGRO began in 1994, when JW Charles/CSG was the principal underwriter of AGRO's initial public offering of one million shares of common stock, which raised approximately $5 million. AGRO's business plan was to invest in companies that had a significant presence in Cuba, in the hope that restrictions on American investment and business activity there would be liberalized. Following the offering, AGRO registered with the Commission under the Investment Company Act of 1940 and did business as a "business development company."
From the onset of aftermarket trading in AGRO common stock, JW Charles/CSG was the principal market-maker for the stock, and remained so at all relevant times. Until December 1996, JWCC held a position in AGRO stock consistent with typical market making practice, ending each day with no AGRO stock, or a small long or short position.
From its inception as a public company, AGRO made few investments in operating business enterprises. In the three years from its underwriting to JWCFS's tender offer for it, AGRO always held over 80% of its assets in cash and other short-term instruments. The prospectus for AGRO's public offering stated that the fund intended to invest at least 65% of the proceeds in eligible portfolio companies, but the fund did not do so.
JWCFS attempted to assist AGRO by seeking merger partners for it. By mid-1995, JWCFS's management had decided to have JWCFS, or one of its operating subsidiaries, broker a transaction that could alter the control and management of AGRO, preferably by merging it with an ongoing concern. JWCFS was interested in assisting AGRO because many of AGRO's shareholders were JWCharles/CSG retail customers. Between mid-1995 and the fall of 1996, several potential mergers involving AGRO, all brokered by JWCFS or its subsidiaries, fell through.
In early 1996, when AGRO still had not invested much of its money, and strategic partnering initiatives had not proved successful, JWCFS began to become concerned that AGRO was not going to be able to execute its business plan.
In February 1996, Cuba shot down two United States unarmed civilian planes, chilling relations between the United States and Cuba. As a result, JWCFS management became even more convinced that AGRO's business plan and investment strategy could not be implemented. In March 1996, less than one month after the planes were shot down, the JWCFS board considered the possible acquisition of AGRO by JWCFS. After a brief discussion, the JWCFS board took no action on the matter.
In September 1996, the JWCFS board created an "Assessment Task Force" to determine what, if any, action JWCFS should take with respect to AGRO. The Task Force was an informal board committee consisting solely of the chairman and vice-chairman of JWCFS.4
In December 1996, JWCFS, through JWCC, acquired a position in AGRO shares far in excess of any it had obtained previously. For instance, at the end of November 1996, JWCC owned 450 shares of AGRO common stock. By the end of December, it owned 167,125 AGRO shares, 13.2% of the total outstanding. All of these shares were obtained through JWCC consistently maintaining the high bid for AGRO.
The acquisition of this large position in AGRO shares occurred approximately three months after the creation by JWCFS of the Assessment Task Force. It also occurred shortly after the failure of another JWCFS-brokered merger involving AGRO.
JWCFS's departure from its prior market making practices with respect to AGRO is evidenced by more than its significant position in AGRO shares. Shortly after December 1996, when it had accumulated a significant position in AGRO common stock, JWCC moved its AGRO trading out of the account it typically used for market making transactions (and had been using for its AGRO trading), into a different account, unrelated to market making. It did so because AGRO had changed from a "trading risk" to an "investment risk" for JWCFS. The firm did not want to penalize traders (whose compensation depended, in part, on profits in the market making account) for losses the firm might incur by what was, in effect, a huge, unhedged, investment in AGRO. Nor did JWCFS want its traders to know that the firm was accumulating a significant amount of AGRO common stock.
In addition, JWCC, despite the accumulation of a large inventory of AGRO shares, maintained the high bid for AGRO.5 This practice was at odds with the firm's customary practice in the prior three years of lowering its bid as market interest in a security diminished.
Finally, AGRO became JWCFS's largest investment. JWCFS's management made the decision to maintain the high bid price for AGRO, knowing that that decision would cause JWCFS, through JWCC, to accumulate a large position in AGRO. JWCFS's investment in AGRO ultimately exceeded $1 million, an investment completely out of character with JWCC's normal market-making practices.6
2. JWCFS Fails to Timely File and Amend a Schedule 13D Reflecting its Beneficial Ownership of AGRO Shares
In December 1996, JWCFS, through JWCC, acquired beneficial ownership of over five percent of the outstanding shares of AGRO common stock, an amount that required it to file either a Schedule 13G or 13D with the Commission, depending on the particular circumstances that pertained. On January 10, 1997, JWCC, holding 171,525 AGRO shares (13.56% of the amount outstanding) beneficially owned by JWCFS, filed a Schedule 13G.
By March 11, 1997, JWCFS, through JWCC, beneficially owned 262,000 AGRO shares, or 20.7% of the shares outstanding. On that date, JWCC filed with the Commission what the company labeled a "voluntary" Schedule 13D. Between March 11 and June 8, JWCC's position in AGRO reached 25% of the then-outstanding AGRO shares. During this period, JWCC did not amend its March 11 "voluntary" Schedule 13D to reflect each instance it acquired an additional one percent of AGRO's outstanding shares. On June 9, 1997, when it held over 25% of the outstanding AGRO common stock, JWCFS7 commenced a tender offer for AGRO's stock.8 The terms of the offering were .431 JWCFS shares for each share of AGRO. The offering was successful, expiring on September 23, 1997, with JWCFS owning approximately 822,938 shares, or 91%, of the outstanding shares of AGRO common stock. Thereafter, in December 1998, JWCFS acquired the remaining AGRO shares in a statutory short-form merger, paying consideration on the same percentage basis as in the tender offer,9 so that JWCFS currently owns all of the outstanding shares of AGRO common stock.
JWCFS Violated Section 13(d) of the Exchange Act, and Rules 13d-1 and 13d-2 Thereunder
Section 13(d) of the Exchange Act, and Rule 13d-1(b) thereunder, require a person to file a report on Schedule 13D within 10 days of acquiring more than five percent of a security registered under Exchange Act Section 12. A Schedule 13D filer is required to "promptly" amend the Schedule 13D if there is a "material" change in its ownership position. Exchange Act Rule 13d-2(a) defines "material change" to include a one percent or more change in ownership.
JWCFS violated Section 13(d) of the Exchange Act, and Rule 13d-1 thereunder, because it did not file a timely Schedule 13D upon its acquisition of over five percent of the outstanding shares of AGRO, and violated Rule 13d-2 by not filing timely amendments to a Schedule 13D.
Although JWCC filed a Schedule 13G upon acquiring 13.56% of the outstanding shares of AGRO, it was required to file on Schedule 13D at that time. While JWCC was, at relevant times, a broker or dealer registered with the Commission under Section 15(b) of the Exchange Act, it did not acquire its reportable position in AGRO shares in the ordinary course of business as routinely conducted, as required by Rule 13d-1(b)(1)(i). Acquiring such a large block of AGRO stock, in the manner it acquired it, was not part of JWCC's routine market making activity.
JWCFS's failure to initially file a Schedule 13D may have provided it with advantages in its eventual effort to acquire control of AGRO. By filing on Schedule 13G, which is designed to reflect passive investments made in the ordinary course of business, JWCC was able to accumulate additional AGRO shares between December 1996 and its "voluntary" Schedule 13D filing in March 1997, without drawing as much attention to its activities as would have occurred if it had filed on Schedule 13D. As a result, JWCFS, through JWCC, was able to acquire a large position in AGRO common stock without informing the market of its level of AGRO holdings, and how rapidly those holdings were rising. Thereafter, by failing to amend its Schedule 13D to report additional one percent acquisitions, JWCFS, through JWCC, was able to accumulate additional shares of AGRO without informing the marketplace.
Based on the foregoing, the Commission deems it appropriate to accept the Respondent's Offer and to impose the remedial relief specified in the Offer.
Accordingly, IT IS ORDERED that, pursuant to Section 21C of the Exchange Act, Respondent JWGenesis Financial, Inc., formerly JWCFS, cease and desist from committing or causing any violation, and any future violation, of Section 13(d) of the Exchange Act, and Rules 13d-1 and 13d-2 thereunder.
By the Commission.
1 JWCFS is now known as JWGenesis Financial, Inc. JW Charles Clearing Corp. ("JWCC"), a wholly-owned subsidiary of JWCFS at the times pertinent hereto, was the purchaser of the AGRO shares beneficially owned by JWCFS through most of the December 1996 to June 1997 time period.
2 The name change to JWGenesis Financial, Inc. occurred in December 1999.
3 JWCFS no longer has any ownership interest in JWCC.
4 The chairman of JWCFS was also the president of JWCFS and held the same three titles at JWCC. The vice-chairman was a vice president director of JWCC.
5 Because JWCFS was the lead underwriter of the AGRO public offering and sold AGRO shares in that offering predominantly to its own customers, the firm continued to act as the principal market maker for AGRO stock.
6 For JWCFS or a subsidiary to maintain a position of over $20,000-$25,000 in a security overnight required the approval of the firm's chairman or the vice-chairman.
7 Shortly before the tender offer for AGRO was commenced, JWCC transferred all of the AGRO shares it owned to JWCFS.
8 At this time, JWCC and the other JWCFS-owned broker-dealers withdrew as market makers in AGRO stock.
9 As a result of the statutory share exchange on June 12, 1998, JWGenesis Financial Corp. had replaced JWCFS as the public holding company (with the shareholders of JWCFS receiving one share of JWGenesis Financial Corp.'s common stock for each share of JWCFS common stock), and so the common stock of JWGenesis Financial Corp. was used in the short-form merger with AGRO.