UNITED STATES OF AMERICA
Securities Exchange Act of 1934
Investment Advisers Act of 1940
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that administrative proceedings be, and hereby are, instituted (i) pursuant to Sections 15(b)(6) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Guy P. Wyser-Pratte ("Wyser-Pratte"), (ii) pursuant to Sections 15(b)(4) and 21C of the Exchange Act against Wyser-Pratte and Co., Inc., and (iii)pursuant to Sections 203(e) and 203(k) of the Advisers Act against Wyser-Pratte Management Co., Inc., to determine whether Wyser-Pratte and Wyser-Pratte and Co., Inc. violated, caused or aided and abetted violations of Section 15(f) of the Exchange Act, and to determine whether Wyser-Pratte and Wyser-Pratte Management Co., Inc. violated, caused or aided and abetted violations of Section 204A of the Advisers Act. (Wyser-Pratte, Wyser-Pratte and Co., Inc. and Wyser-Pratte Management Co., Inc. hereinafter are referred to collectively as "Respondents.")
In anticipation of the institution of these administrative proceedings, Respondents have each submitted an Offer of Settlement ("Offers"). The Commission has determined that it is appropriate and in the public interest to accept Respondents' Offers, and accordingly it is issuing this Order. Solely for the purposes 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 set forth below, except as to the jurisdiction of the Commission over themselves and over the subject matter of these proceedings, which they admit, Respondents consent to the entry of this Order Instituting Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, Making Findings, Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order").
The Commission makes the following factual findings:
This matter concerns the failure to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information at Wyser-Pratte and Co., Inc., a broker-dealer registered with the Commission, and at Wyser-Pratte Management Co., Inc., an investment adviser registered with the Commission. (Wyser-Pratte and Co., Inc. and Wyser-Pratte Management Co., Inc. hereinafter are referred to collectively as "the firms.") The firms are under the common ownership and control of Wyser-Pratte.
Wyser-Pratte and the firms are engaged in merger arbitrage and in investment initiatives involving companies where Wyser-Pratte and the firms pursue changes in the companies' governance (hereinafter "investment initiatives"). In certain instances the investment initiatives have involved investments in companies that have rejected merger or takeover proposals from other companies. The initiatives have often involved contacts between Wyser-Pratte and various market participants, including corporate officers and directors, their agents, and other persons in possession of material nonpublic information. Wyser-Pratte's contacts with such market participants, and his control over all trading activities at the firms, coupled with the failure of the firms to establish adequate policies and procedures relating to material nonpublic information, created an identifiable potential for the misuse of such information.
Wyser-Pratte has been engaged in the business of merger arbitrage with various firms for almost 35 years. In the early 1990s he formed Wyser-Pratte and Co., Inc., a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act, and Wyser-Pratte Management Co., Inc., an investment adviser registered with the Commission pursuant to Section 203(c) of the Advisers Act, to engage in merger arbitrage. Wyser-Pratte Management Co. has approximately $500 million under management for institutions and high-net worth individuals. Wyser-Pratte and Co. provides broker-dealer services to the investment adviser firm and also has a small number of discretionary accounts, but does not otherwise engage in market making or retail broker-dealer activities. Wyser-Pratte is the sole owner of the firms; he establishes policy for the firms; he has sole investment discretion over all accounts at the firms. The firms share office space in New York City, and together they have a small staff, including a director of research, two traders, a financial principal and support personnel.
The firms' main business, merger arbitrage, involves the investment in companies that are the subject of public merger or takeover announcements. As described in a published monograph written by Wyser-Pratte, Risk Arbitrage II, the typical merger arbitrage investment, in the most simple situation, involves taking a long position in the stock of the target firm, and simultaneously taking a short position in the stock of the acquiring firm. The short position "locks in" the spread on the transaction, and it serves as a hedge on the long position in the target stock. The firms have generally followed this strategy in their merger arbitrage investments, and they have used other hedging strategies to guard against risks specific to the transactions in question, and against overall market risk. Such hedging strategies have often involved taking a long and/or short position in other stocks, in issuer put and call options, andin various index options. By using such strategies, the firms attempt to generate above market returns for their clients while maintaining a market neutral trading position.
C. Wyser-Pratte's Investment Initiatives
In recent years, Wyser-Pratte and the firms have undertaken investment initiatives in companies where they have submitted various proposals for shareholder vote which are designed to cause changes in the companies' governance. While the specific issues and tactics have varied, the investment initiatives have generally involved taking a substantial long position in the stock of companies that have publicly rejected recent merger or takeover offers. In recent years such proposals have included rescinding or modifying a company's "shareholder rights plan" (more commonly called a "poison pill"). Wyser-Pratte has also nominated candidates for election to a target company's board of directors, and in one instance he consented to serve personally on a board of directors. Wyser-Pratte's shareholder proposals and director nominations have been accompanied by the issuance of press releases and in-person statements to the financial press. Wyser-Pratte has typically urged shareholders to support his proposals and he has questioned the actions taken by the target company's management in rejecting takeover proposals. Unlike the firms' merger arbitrage investments, which are usually short-term and liquidated after execution of a transaction, the firms have held the investments that are the subject of an investment initiative longer, without necessarily having a specific event controlling termination of the investment. As with the firms' other holdings, these investments are usually hedged against market and transactional risk.
D. Wyser-Pratte Interacts with Market Participants
Wyser-Pratte's investment initiatives have given him regular access to persons in possession of material nonpublic information concerning issuers. In order to advance his shareholder proposals and for other reasons, Wyser-Pratte, and sometimes one of the firms' employees, have frequently discussed shareholder proposals and other matters with numerous interested market participants, including target company officers and directors, potential acquirers, investment bankers and other professional advisers, members of the press, large shareholders, and potential shareholders. Such market participants have, at the time of their discussions with Wyser-Pratte, often been in possession of material nonpublic information concerning issuers that have been the subject of these discussions. This knowledge may have been gained directly, or indirectly through confidentiality agreements with issuers and the like. On occasion such market participants have also provided information to Wyser-Pratte concerningtheir activities and intentions with respect to the issuers that were the subject of an investment initiative and in which the firms' clients held a substantial long position.
E. The Firms' Policies and Procedures to Prevent the Misuse of Nonpublic Information
Wyser-Pratte and Co. and Wyser-Pratte Management Co. shared a Written Supervisory and Procedures Manual, which prohibited trading securities "on" material nonpublic information.1 The Manual required employees "who may have potential inside information" to ask themselves whether the information is material and nonpublic and, if they have further questions, to consult a manager or the compliance officer. To prevent insider trading, the Manual required Wyser-Pratte and Co.'s compliance officer to, among other things, "resolve issues of whether information received by an officer, director or employee of the Firm is material and nonpublic," and "if necessary, restrict officers directors and employees from trading the securities." The Manual also required the establishment of procedures to create an information barrier around any associated person of Wyser-Pratte Management Co. who was involved in "investment banking transactions" and had thereby gained potential access to material nonpublic information.
Wyser-Pratte and Co., Inc. Violated Section 15(f) of the Exchange Act, and Wyser-Pratte Management Co., Inc. Violated Section 204A of the Advisers Act
Section 15(f) of the Exchange Act requires brokers and dealers registered with the Commission to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such broker's or dealer's business, to prevent the misuse, in violation of the federal securities laws, of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer. Section 204A of the Advisers Act requires investment advisers to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser's business, to prevent the misuse, in violation of the federal securities laws, of material, nonpublicinformation by such investment adviser or any person associated with such investment adviser.
Taking into consideration the activities of the firms in connection with their investment initiatives, and in particular the position of the firms' owner in making trading decisions and carrying out those initiatives, the firms' policies and procedures were not reasonably designed to prevent the misuse of material, nonpublic information. The firms therefore willfully violated Section 15(f) of the Exchange Act and Section 204A of the Advisers Act.2 As the sole owner, and the individual who established all significant firm policies, Wyser-Pratte willfully aided and abetted, and was a cause of the firms' violations.
The procedures of the firms described above in paragraph III.E. were inadequate given the nature of their businesses. Most importantly, the procedures did not take into account the central position of Wyser-Pratte, the owner of the firms. As a practical matter, Wyser-Pratte makes all trading decisions at both firms; he also directs and participates actively in the firms' investment initiatives. It was a foreseeable consequence of such participation, in particular the interaction with other market participants, that Wyser-Pratte would be exposed regularly to persons in possession of material nonpublic information concerning issuers targeted for such initiatives. Notwithstanding his dual role, Wyser-Pratte was not subject to any procedures other than the general requirement to self-evaluate information that came to his attention and to refrain from trading that would violate the law. In this regard, Wyser-Pratte has directed trading relating to an issuer, including hedging transactions, after exposure through the firms' investment initiatives to persons in possession of material nonpublic information relating to that issuer. In light of the firms' businesses, with the possibility for exposure of Wyser-Pratte to material nonpublic information, the policies and procedures set forth in the firms' Manual were not adequate to guard against potential misuse of such information and, in particular, did not address the firms' hedging and other trading of securities in the course of a particular initiative.
The securities industry has long been aware of the need for effective compliance policies to guard against the risk of misuse of material nonpublic information and to tailor those policies to the specific activities of the individual firm. See, e.g., In re Gabelli & Co., Inc. and Gamco Investors, Inc., Exch. Act Rel. No. 35057 (December 8, 1994). The firms' businesses, as practiced, have involved interaction with marketparticipants who are in possession of material nonpublic information. This interaction created a need to establish specific policies and procedures to address the potential receipt of such information by Wyser-Pratte or other employees of the firms. Under these circumstances, the firms' policies needed to be particularly sensitive to the possibility of misuse and to include safeguards tailored to the particular risks attending such interactions with market participants.3
Accordingly, the Commission finds that:
A. Wyser-Pratte and Co., Inc. willfully violated Section 15(f) of the Exchange Act;
B. Wyser-Pratte Management Co., Inc. willfully violated Section 204A of the Advisers Act; and
C. Guy P. Wyser-Pratte willfully aided and abetted, and was a cause of violations of Section 15(f) of the Exchange Act and Section 204A of the Advisers Act.
Accordingly, IT IS HEREBY ORDERED that:
A. Guy P. Wyser-Pratte:
1. Be, and hereby is, censured;
2. Cease and desist from committing or causing any violations of, and any future violations of, Section 15(f) of the Exchange Act and Section 204A of the Advisers Act; and
3. Pay a civil money penalty of $50,000 within ten (10) days of the entry of this Order;
B. Wyser-Pratte and Co., Inc.:
1. Be, and hereby is, censured;
2. Cease and desist from committing or causing any violations of, and any future violations of, Section 15(f) of the Exchange Act; and
3. Pay a civil money penalty of $200,000 within ten (10) days of the entry of this Order;
C. Wyser-Pratte Management Co., Inc.:
1. Be, and hereby is, censured;
2. Cease and desist from committing or causing any violations of, and any future violations of, Section 204A of the Advisers Act; and
3. Pay a civil money penalty of $200,000 within ten (10) days of the entry of this Order;
D. Payment of such civil money penalties shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the U.S. Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies the Respondents in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Scott W. Friestad, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington DC 20549-0708.
E. Within 30 days of this Order, Respondents shall comply with the undertaking to:
1. retain an Independent Consultant, not unacceptable to the Commission, at the Respondents' expense, to: (a) conduct a comprehensive review of the policies, procedures, and practices maintained and implemented by the firms pursuant to Section 15(f) of the Exchange Act and Section 204A of the Advisers Act; and (b) prepare a Report reviewing the adequacy of the firms' current policies and procedures and making recommendations as to how the firms should modify or supplement such policies and procedures to prevent the misuse of material, nonpublic information in compliance with Section 15(f) of the Exchange Act and Section 204A of the Advisers Act. The Independent Consultant may rely on the work of additional consultants or experts as it deems necessary in carrying out its responsibilities. For the period of engagement, and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Respondents, or with any of the firms' present or former affiliates, directors, officers, employees, or agents acting in their capacity. Any firm with which the Independent Consultant is affiliated, or which he or she is a member, and any person engaged to assist the Independent Consultant in performance of his or her duties under this Order shall not, without prior written consent of Scott W. Friestad, Assistant Director, Division of Enforcement, or his designee, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Respondents, or with any of the firms' present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement;
2. provide the Commission's staff, within 30 days of the entry of this Order, with a copy of an engagement letter detailing the scope of the Independent Consultant's responsibilities pursuant to paragraph VI. E. 1. above. The engagement letter shall provide, at a minimum, that the review will comply with the requirements of paragraph VI. E. 5. below;
3. adopt, implement and maintain the procedures and the system for applying those procedures recommended by the Independent Consultant in the Report within the period of time prescribed in paragraph VI. E. 4. below. Provided, however, that as to any recommendation of the Independent Consultant that the firms determine is, in whole or in part, unduly burdensome, the firms may suggest an alternative procedure, designed to achieve the same objective or purpose as that of the recommendation of the Independent Consultant. The firms shall set forth in an affidavit to be submitted pursuant to paragraph VI.E.4 of this Order such alternative procedure, and a description of how such alternative procedure achieves the same objective or purpose as the Independent Consultant's original recommendation. TheIndependent Consultant shall evaluate any alternative procedure proposed by the firms and the firms shall abide by the Independent Consultant's determination with regard thereto and adopt those recommendations that the Independent Consultant shall ultimately determine are appropriate.
4. require the Independent Consultant to complete the review and deliver the Report described in VI.E.1. above, to the Respondents and the Commission staff within 90 days of the issuance of this Order. The firms shall, within six months after the issuance of the Independent Consultant's Report, submit to the Commission staff an affidavit attesting to their implementation of the recommendations contained in the Report and setting forth the details of their implementation of the recommendations contained in the Report.
5. require the Independent Consultant to review the firms' policies, procedures, and practices and deliver a supplemental report one year after the delivery of the Report to the Commission staff, analyzing the firms' adoption, implementation, and maintenance of the policies, procedures, and practices contained in the Report and the effectiveness of those policies, procedures and practices.
By the Commission.
1 Prior to the filing of these proceedings, the firms revised their Manual and this Order addresses those policies and procedures that existed prior to these changes.
2 As used in this Order, "willful" means intentionally committing the act which constitutes the violation. There is no requirement that the actor also be aware that he is violating the federal securities laws. See, Wonsover v. SEC, 205 F.3d 408, 413-416 (D.C. Cir. 2000).
3 A similar situation was discussed recently in Selective Disclosure and Insider Trading, Exch. Act Rel. No. 43154, fn. 125 (August 15, 2000). Rule 10b5-1 does not necessarily provide a defense to an institution that manages a proprietary position through hedging, when the personnel who direct trading may also be aware of material nonpublic information. A pre-planned hedging formula, segregation of personnel, or other steps may be necessary to avoid misuse of material nonpublic information.