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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. 44882 / September 28, 2001

INVESTMENT COMPANY ACT of 1940
RELEASE NO. 25201 / September 28, 2001

ADMINISTRATIVE PROCEEDING
FILE NO. 3-10610


In the Matter of

LAWRENCE P. GRADY,

Respondent


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ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 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 to institute public administrative and cease-and-desist proceedings against Respondent Lawrence P. Grady (Grady) pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act) and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (Investment Company Act).

In anticipation of the institution of these proceedings, Grady has submitted an Offer of Settlement (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 Commission's findings contained herein, except to the Commission's jurisdiction over him and the subject matter of this proceeding, which are admitted, Grady consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Exchange Act and Sections 9(b) and 9(f) of the Investment Company Act, Making Findings and Imposing Remedial Sanctions (Order).

II.

On the basis of the Order and Grady's Offer, the Commission makes the following findings:

A. Respondent

Grady, age 61, is a resident of Minneapolis, Minnesota. Grady is the president, a director and the sole employee of Minn Shares, Inc. (Minn Shares), a registered investment company. Grady has served as a director, the Secretary and the Treasurer of Minn Shares since 1989, and as the President since 1993. He is the beneficial owner of approximately 41% of Minn Shares' outstanding shares. Minn Shares is the only investment company with which Grady has been affiliated.

B. Other Relevant Entity

Minn Shares, a Minnesota corporation headquartered in Minneapolis, Minnesota, has been registered with the Commission as an investment company pursuant to Section 8(a) of the Investment Company Act since August 13, 1993. Prior to registering as an investment company, Minn Shares was a frozen yogurt business named The Yogurt Place, Inc. Minn Shares is a closed-end, non-diversified management investment company with 5,713,455 outstanding shares of common stock and approximately 370 shareholders. Minn Shares' portfolio comprises mostly illiquid securities in developmental stage companies and a relatively small number of liquid securities. Minn Shares was quoted on the NASD's over-the-counter Bulletin Board under the ticker symbol MSHS until it was delisted on or about October 10, 2000. As of Minn Shares' fiscal year end date of December 31, 1999, Minn Shares' portfolio was valued at approximately $558,000 and the net asset value of its shares was $0.09 per share.

FACTS

Grady's Disregard of the Regulatory Requirements of the Investment Company Act

C. At all relevant times, Grady has made management decisions for Minn Shares and been personally responsible for ensuring Minn Shares' compliance with all applicable provisions of the Investment Company Act. Minn Shares does not have, nor has it ever had, an investment adviser. During the relevant time period, Minn Shares' board of directors consisted of three directors, including Grady. In 2000, the two independent directors resigned.

D. Notwithstanding his compliance responsibilities, Grady has failed to take adequate measures to ensure Minn Shares' compliance with certain provisions of the Investment Company Act, as described below.

1. From Minn Shares' inception as a registered investment company in August 1993 until on or about November 5, 1998, Minn Shares operated without a written code of ethics to prevent its access persons from engaging in fraudulent conduct in connection with the purchase or sale of any security held or to be acquired by it, as required by Section 17(j) of the Investment Company Act and former Rule 17j-1(b)(1) thereunder.1

2. From Minn Shares' inception as a registered investment company in August 1993 until in or about January 1999, Grady failed to report his personal securities transactions to Minn Shares, as required by Section 17(j) of the Investment Company Act and former Rule 17j-1(c)(1) thereunder.2 Further, Grady has never reported his wife's personal securities transactions to Minn Shares, as required by the same Investment Company Act provision.

3. In or about November 1998, Grady failed to file with the Commission Minn Shares' Notice and Proxy Statement for the Annual Meeting of Shareholders (1998 Proxy), as required by Section 20(a) of the Investment Company Act and Rule 20a-1 thereunder. Grady signed the 1998 Proxy and disseminated it to shareholders on or about November 12, 1998.

4. From Minn Shares' inception as a registered investment company in August 1993 to the present, Grady caused Minn Shares to operate without a fidelity bond, as required under Section 17(g) of the Investment Company Act and Rule 17g-1 thereunder. At Minn Shares' inception, Grady knew that Minn Shares required a fidelity bond, but Minn Shares did not file an application for a fidelity bond until after August 1997. Although Minn Shares eventually applied for a fidelity bond several times, each bond company denied Minn Shares' application. To date, Minn Shares has been unable to obtain a fidelity bond.

5. From Minn Shares' inception as a registered investment company until in or about February 1999, Grady caused Minn Shares to fail to transmit to its shareholders required reports or other information containing financial information on at least a semi-annual basis, as required by former Section 30(d) of the Investment Company Act3 and Rule 30d-1 thereunder.

6. Grady caused an affiliated person of Minn Shares to engage in a prohibited transaction with Minn Shares. On or about September 21, 1995, a Minn Shares' director, and thus an affiliated person, as defined in Section 2(a)(3)(D) of the Investment Company Act, knowingly sold shares of stock in a privately-held corporation to Minn Shares, in violation of Section 17(a)(1) of the Investment Company Act. Grady transacted this stock purchase on behalf of Minn Shares. Minn Shares did not apply for an exemptive order as required by Section 17(b) of the Investment Company Act, and the Commission did not issue an order.

Material Misrepresentation in Proxy Statements

E. In addition to the above-described violations, Grady made untrue statements of material fact about Minn Shares' compliance with the Investment Company Act to Minn Shares' shareholders and other members of the public in two proxy statements.

1998 Proxy

F. On or about November 12, 1998, Grady, on behalf of Minn Shares, disseminated the 1998 Proxy to Minn Shares' shareholders, which stated that Minn Shares "intends to remain in compliance with all applicable provisions of the 1940 Act [Investment Company Act]...." Grady reviewed the language in the 1998 Proxy and signed the 1998 Proxy before he disseminated it to shareholders.

G. When Grady disseminated the 1998 Proxy to shareholders, he knew, or was reckless in not knowing, that Minn Shares was not in compliance with several provisions of the Investment Company Act and that the statement in the 1998 Proxy was materially false and misleading.

1996 Proxy

H. On or about July 25, 1996, Grady, on behalf of Minn Shares, filed a Notice and Proxy Statement for the Annual Meeting of Shareholders dated July 25, 1996 (1996 Proxy) with the Commission. Like the 1998 Proxy, the 1996 Proxy stated that Minn Shares "intends to remain in compliance with all applicable provisions of the 1940 Act...." Grady reviewed the language in the 1996 Proxy and signed the 1996 Proxy before he filed it with the Commission.

I. When Grady disseminated the 1996 Proxy to shareholders, he knew, or was reckless in not knowing, that Minn Shares was not in compliance with several provisions of the Investment Company Act and that the statement in the 1996 Proxy was materially false and misleading.

VIOLATIONS

J. As a result of the false and misleading statements made by Grady in Minn Shares' 1996 Proxy and 1998 Proxy regarding Minn Shares' compliance with the Investment Company Act, as more fully described in paragraphs E. through I. above, Grady willfully violated the following provisions:

1. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that he, in connection with the purchase or sale of shares of Minn Shares, by use of the means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange, directly or indirectly: 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 as a fraud or deceit.

2. Section 20(a) of the Investment Company Act and Rule 20a-1 thereunder and Section 14(a) of the Exchange Act and Rule 14a-9 thereunder by soliciting or permitting the use of his name to solicit any proxy, consent, or authorization with respect to any security issued by a registered Fund, namely Minn Shares, that contained statements which, at the time and in the light of the circumstances under which they were made, were false or misleading with respect to material facts, or which omitted to state material facts necessary in order to make the statements therein not false or misleading or necessary to correct any statement in earlier communications with respect to the solicitation of a proxy for the same meeting or subject matter which became false or misleading.

3. Section 34(b) of the Investment Company Act by making untrue statements of material fact in a registration statement, application, report, account, record, or other document filed or transmitted pursuant to the Investment Company Act or the keeping of which is required pursuant to Section 31(a) of the Investment Company Act.

K. Grady willfully violated Section 17(j) of the Investment Company Act and former Rule 17j-1(c)(1) thereunder (redesignated as Rule 17j-1(d)), which required an access person of an investment company to report all securities transactions in which he acquired a direct or indirect beneficial ownership to the investment company. As part of this conduct, Grady, an officer and director of Minn Shares, and therefore an access person of Minn Shares as that term is defined under Rule 17j-1(a)(1)(i) of the Investment Company Act, failed to report any of his personal securities transactions to Minn Shares until in or about January of 1999. Grady also failed to report his wife's securities transactions to Minn Shares, which he was required to do under Section 17(j) of the Investment Company Act and former Rule 17j-1(c)(1) thereunder (redesignated as Rule 17j-1(d)(1)), because he had a beneficial ownership interest in his wife's securities transactions as determined under Section 16(a) of the Exchange Act and Rules 16a-1(a)(2) and 16a-1(e) thereunder.

L. Grady willfully violated Section 20(a) of the Investment Company Act and Rule 20a-1 thereunder and Section 14(a) of the Exchange Act and Rule 14a-6(b) thereunder by soliciting, or permitting the use of his name to solicit, a proxy, consent or authorization, in respect of a security of which a registered investment company is the issuer, namely shares of Minn Shares, which failed to comply with Rule 20a-1 of the Investment Company Act and all rules and regulations adopted pursuant to Section 14(a) of the Exchange Act that would have been applicable to such solicitation if it were made in respect of a security registered on a national securities exchange. As part of such conduct, Grady failed to file with the Commission Minn Shares' 1998 Proxy, which he signed and transmitted to shareholders on or about November 12, 1998.

M. From Minn Shares' inception as a registered investment company to the present, Grady caused and willfully aided and abetted Minn Shares' violation of Section 17(g) and Rule 17g-1 thereunder, in that he substantially contributed to Minn Shares', a registered investment company, failure to provide and maintain a bond against larceny and embezzlement, covering each officer or employee of Minn Shares, who may singly or jointly with others, have access to securities or funds of the investment company.

N. Grady caused and willfully aided and abetted Minn Shares' violation of Section 17(j) of the Investment Company Act and former Rule 17j-1(b)(1) thereunder (redesignated as Rule 17j-1(c)(1)), which required registered investment companies to adopt written codes of ethics to prevent access persons from engaging in fraudulent conduct prohibited under Section 17(j) of the Investment Company Act and former Rule 17j-1(a) thereunder (redesignated as Rule 17j-1(b)(1)). Grady was aware that Minn Shares had no code of ethics and he provided substantial assistance to Minn Shares' violation by causing Minn Shares to operate without a written code of ethics for more than five years after Minn Shares' registration as an investment company.

O. From in or about August 1993 up to and including in or about February 1999, Grady caused and willfully aided and abetted Minn Shares' violation of former Section 30(d) of the Investment Company Act (redesignated as Section 30(e)) and Rule 30d-1 thereunder, which required registered investment companies to transmit reports containing financial statements within 60 days of the end of each semi-annual fiscal period. Minn Shares failed to transmit such required reports to shareholders until February 1999. Because Grady was aware of this requirement and substantially contributed to Minn Shares' failure to comply, Grady caused and willfully aided and abetted Minn Shares' violation of former Section 30(d) (redesignated as Section 30(e)) of the Investment Company Act and Rule 30d-1 thereunder.

P. Grady caused and aided and abetted an affiliated person's violation of Section 17(a)(1) of the Investment Company Act, which prohibits, in part, any affiliated person...of...a registered investment company, or any affiliated person of such affiliated person...acting as principal, from purchasing or selling securities or property from or to such registered investment company, unless the Commission grants an order under Section 17(b) of the Investment Company Act exempting the transaction from the provisions of Section 17(a)(1). Section 2(a)(3)(D) of the Investment Company Act defines an affiliated person of an investment company to include "any officer, director...or employee" of the investment company. As part of this conduct, on or about September 21, 1995, Grady substantially contributed to Minn Shares' purchase of stock in a privately-held company from a Minn Shares' director, who was an affiliated person of Minn Shares as that term is defined under Section 2(a)(3)(D) of the Investment Company Act, without the grant of an exemption by the Commission.

III.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions that are set forth in the Offer submitted by Grady.

Accordingly, IT IS HEREBY ORDERED that:

A. Pursuant to Section 21C of the Exchange Act and Section 9(f) of the Investment Company Act, Grady cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 14(a) of the Exchange Act and Rules 10b-5, 14a-6(b) and 14a-9 thereunder, and Sections 17(j), 20(a) and 34(b) of the Investment Company Act and Rules 17j-1(c)(1) (redesignated as Rule 17j-1(d)(1)) and 20a-1 thereunder, and from causing any violation and any future violation of Sections 17(a)(1), 17(g), 17(j) and 30(d) (redesignated as Section 30(e)) of the Investment Company Act and Rules 17g-1, 17j-1(b)(1) (redesignated as Rule 17j-1(c)(1)) and 30d-1 thereunder.

B. Pursuant to Section 9(b) of the Investment Company Act, Grady 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, with the right to reapply to the Commission to serve or act in any such capacity after three years from the date of the Order.

C. Pursuant to Section 9(d) of the Investment Company Act, Grady shall pay a civil penalty in the amount of $10,000, plus post-judgment interest in the total amount of $303.09, to the United States Treasury as follows:

1. Grady shall pay $2,000 within ten days of the entry of this Order;

2. Grady thereafter shall make four payments of $2,075.78 each by 90, 180, 270 and 360 days from the date of the Order;

3. Each 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, Mail Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under cover letter which identifies Grady as the 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 Mary E. Keefe, Regional Director, Midwest Regional Office, Securities and Exchange Commission, 500 W. Madison, Suite 1400, Chicago, Illinois 60661.

By the Commission.

Jonathan G. Katz
Secretary


Footnotes

1 The Commission's recent amendments to Rule 17j-1 of the ICA, which became effective on October 29, 1999, redesignated former Rule 17j-1(b) as Rule 17j-1(c) without changing the substance of this provision. See Investment Company Act Rel. No. 23958 (Aug. 20, 1999).
2 The Commission's recent amendments to Rule 17j-1 of the ICA also redesignated former Rule 17j-1(c)(1) as Rule 17j-1(d)(1) without changing the substance of this provision.
3 In 1996, Congress redesignated Section 30(d) as Section 30(e) without changing the substance of this provision. See The National Securities Market Improvements Act of 1996, (Pub. L. No. 104-290, 110 Stat. 3438) (1996). Minn Shares failed to transmit required shareholders' reports continuously from 1993 through 1999, thereby violating both the old and new sections.


http://www.sec.gov/litigation/admin/34-44882.htm


Modified: 10/03/2001