UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") be instituted against respondent Howard M. Brenner ("Brenner").
In anticipation of the institution of this administrative proceeding, Brenner has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except that Brenner admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Brenner consents to the entry of this Order Instituting Public Administrative Proceeding, Making Findings and Imposing Sanctions ("Order").
Accordingly, IT IS ORDERED that a proceeding pursuant to Section 15(b) of the Exchange Act be, and hereby is, instituted.
On the basis of this Order and Brenner's Offer, the Commission finds that:1
Brenner, age 67, resides in New York, New York. From 1990 to 1996, Brenner was the CEO and president of Brenner Securities Corp.
B. RELATED ENTITY AND PERSON
1. Brenner Securities Corp. ("BSC"), now defunct, was a broker-dealer located in New York City. BSC was registered with the Commission (File No. 8-42513) from April 1990 to December 1996. BSC conducted a general securities business for both retail and institutional customers.
2. Alan Brian Bond ("Bond"), age 39, resides in Upper Montclair, New Jersey. From 1991 to December 1998, he was the president and chief investment officer of Bond, Procope Capital Management, Inc. ("BPCM"), which was formerly a registered investment adviser (File No. 801-38855).
C. BOND'S COMMISSION KICKBACK SCHEME
From at least January 1993 through November 1998, Bond perpetrated a kickback scheme, in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940, in which he received over $6.9 million in commissions from three broker-dealers, one of which was BSC. Bond used the three broker-dealers to execute trades for his advisory clients. From January 1993 to June 1996, Bond received the kickbacks from BSC in the form of improper soft dollar payments. In July 1996, Bond moved his business from BSC to another broker-dealer.
D. BOND'S SCHEME AT BSC
1. In 1993, Bond negotiated a purported soft dollar arrangement with BSC that, in practice, operated as a commission kickback scheme. Bond received commission kickbacks from BSC through its soft dollar payments of Bond's non-research related business expenses and his personal expenses. Pursuant to the arrangement, Bond directed BSC's trading desk to credit the commission on some of his advisory trades to a soft dollar account. On these soft dollar trades, BSC allocated 70-80% of the commission to BPCM's soft dollar account, with the balance going to BSC.
2. Each month, Bond sent BPCM invoices to BSC to be paid as part of the purported soft dollar arrangement. BSC's chief operations officer, who was in charge of all operations at BSC, was responsible for implementing the soft dollar arrangement. BSC's chief operations officer at the time the soft dollar arrangement commenced ("OPS1"), reviewed and approved the invoices for payment. After OPS1 left BSC in January 1995, Bond sent his soft dollar invoices to BSC's new chief operations officer ("OPS2"), who took over approval and payment of the invoices.
3. Although some of the soft dollar invoices that Bond submitted to BSC reflected research conducted on behalf of BPCM clients, other invoices were for non-research related business expenses, such as business cards. Bond also submitted many invoices for travel and entertainment expenses, like his social club dues. In addition, Bond sent his personal credit card bills to BSC. The credit card bills contained copies of receipts that showed purchases that were clearly personal, such as clothing. Of the more than $892,000 in expenses paid by BSC during the relevant period, at least $719,926 were credit card related personal expenses or other travel and entertainment expenses. 2
E. BSC'S OPERATIONS OFFICERS AID AND ABET BOND'S SCHEME
OPS1 approved Bond's improper non-research related business expenses for soft dollar payment. After OPS1 left BSC in January 1995, OPS2 approved the payment of both improper non-research related business expenses and personal expenses with soft dollars. By engaging in this conduct, OPS1 and OPS2 aided and abetted Bond's fraudulent scheme.
F. BRENNER'S FAILURE TO SUPERVISE
1. Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4)(E) of the Exchange Act, authorizes the Commission to sanction a person associated with a broker or dealer if it finds that it is in the public interest to do so and that the person "failed reasonably to supervise, with a view to preventing violations of the [federal securities laws] . . ., another person who commits such a violation, if such other person is subject to his supervision."
2. Brenner was the immediate supervisor of OPS1 and OPS2. Despite his supervisory position, Brenner did not monitor OPS1's and OPS2's payment of Bond's improper soft dollar expenses.
3. Brenner, as BSC's CEO and president, failed to develop and implement soft dollar procedures reasonably designed to prevent and detect the soft dollar violations by OPS1 and OPS2. Brenner did not delegate to anyone at his firm the responsibility for developing and implementing soft dollar procedures. Brenner failed to monitor OPS1's and OPS2's payment of Bond's improper soft dollar expenses. OPS1 and OPS2 aided and abetted Bond's violations by approving and paying non-research related business expenses and personal expenses with soft dollars. Accordingly, Brenner failed reasonably to supervise BSC's operations officers with a view to preventing their federal securities law violations.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Brenner and impose the sanctions specified in the Offer.
Accordingly, IT IS HEREBY ORDERED that:
A. Brenner be, and hereby is, suspended from association in a supervisory capacity with any broker or dealer for a period of six months, effective on the second Monday following the entry of this Order; and
B. Brenner shall provide to the Commission, within 10 days after the end of the six month suspension period described above, an affidavit that he has complied fully with the sanctions described in Section IV, paragraph A above.
IT IS FURTHER ORDERED that Brenner shall, within fourteen days of the entry of this Order, pay a civil money penalty in the amount of $15,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Howard M. Brenner 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 Victoria A. Levin, Esq., Office of Enforcement, Securities and Exchange Commission, 5670 Wilshire Blvd., 11th Floor, Los Angeles, CA 90036.
By the Commission.
1 The findings herein are made pursuant to Brenner's Offer and are not binding on any other person or entity in this or any other proceeding.
2 Section 28(e) of the Exchange Act provides a safe harbor that protects an investment adviser from charges of breach of fiduciary duty for failing to obtain the lowest available commission rate when the adviser uses client brokerage commissions to obtain research and brokerage services from or through a broker-dealer, discloses such use and complies with other applicable requirements. Research is generally defined as a product or service that provides lawful and appropriate assistance to a money manager in making investment decisions. See Republic New York Securities Corp., Advisers Act Release No. 1789, 1999 SEC LEXIS 278, at *3 (Feb. 10, 1999); see also Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters, Exchange Act Release No. 23170, 1986 SEC LEXIS 1689, at *1-3 (Apr. 23, 1986). Non-research benefits obtained by an adviser from a broker-dealer, such as payments for personal expenses, are outside the safe harbor. See Interpretive Release, 1986 SEC LEXIS 1689, at *8-15.