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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. 46081 / June 17, 2002

Investment Advisers Act of 1940
Release No. 2036 / June 17, 2002

Investment Company Act of 1940
Release No. 25615 / June 17, 2002

Administrative Proceeding
File No. 3-10802



In the Matter of
 
PERFORMANCE ANALYTICS,
INC., AND
LESLIE I. GOLEMBO,
 
Respondents.
 
:
:
:
:
:
:
ORDER INSTITUTING PROCEEDINGS,
MAKING FINDINGS,
AND IMPOSING REMEDIAL SANCTIONS
AND CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Section 9(b) of the Investment Company Act of 1940 ("Investment Company Act") against Performance Analytics, Inc. ("Performance"), an investment adviser registered with the Commission, and pursuant to Sections 203(f) and 203(k) of the Advisers Act, Section 9(b) of the Investment Company Act, and Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") against Leslie I. Golembo ("Golembo").

II.

In anticipation of the institution of these proceedings, Performance and Golembo have submitted Offers of Settlement that 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, except those findings pertaining to the jurisdiction of the Commission over them and the subject matter of these proceedings, which they admit, Performance and Golembo by their Offers of Settlement consent to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist order set forth below.

Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(e), 203(f) and 203(k) of the Advisers Act, Section 9(b) of the Investment Company Act, and Section 15(b) of the Exchange Act be, and hereby are, instituted.

III.

On the basis of this Order Instituting Proceedings, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order") and the Offers of Settlement submitted by Performance and Golembo, the Commission makes the following findings:1

A. The Respondents

1. Performance has been a registered investment adviser since 1988 (File No. 801-31349). It has its principal place of business in Chicago, Illinois. Performance, among other things, advises pension funds in selecting and retaining money managers, and also provides peer evaluative services to investment advisers.

2. Golembo, age 57, of Chicago, Illinois, formerly served as the secretary and treasurer of Performance. During the relevant time period, Golembo also served as secretary and treasurer for Performance's affiliated broker-dealer.

B. Facts

1. Summary

This proceeding is based on Performance's and Golembo's material misrepresentations and omissions to one of its clients, a union pension fund ("Client"). In or about 1994, a registered representative of East West Institutional Services, Inc. ("East West), a Michigan broker-dealer, entered into an illegal kickback agreement with two trustees of the Client ("the two trustees") whereby the two trustees caused the Client to hire investment advisers who werewilling to direct brokerage trades to East West, and East West then paid kickbacks of commissions to the two trustees. In 1995, the Client hired Performance as a consultant to provide advice concerning the retention of new investment advisers. In fact, Performance, through Golembo, obtained the consultant position by agreeing to recommend to the Client only those investment advisers that were willing to direct brokerage to East West. Also in 1995, Golembo, on behalf of Performance, recommended to the Client at least one investment adviser, Duff & Phelps Investment Management Co., Inc. ("Duff"), that he knew or was reckless in not knowing was willing to direct brokerage to East West. In 1996, Performance entered into a separate soft-dollar arrangement with Duff, whereby it received $100,000 annually in brokerage commission business directed for the benefit of Performance's affiliated broker dealer, in exchange for a continuing recommendation of Duff to the Client. Performance and Golembo failed to disclose to the disinterested representatives of the Client their arrangement to recommend only those advisers that agreed to direct brokerage to East West. They further failed to disclose to the disinterested representatives of the Client their soft dollar arrangement with Duff pursuant to which they continued to recommend Duff's advisory services to the Client in exchange for Duff's direction of $100,000 per year in brokerage commission business to Performance's affiliated broker-dealer.2 As a result of the above, Performance willfully violated Sections 206(1) and 206(2) of the Advisers Act, and Golembo willfully aided and abetted and caused Performance's violations of Sections 206(1) and 206(2) of the Advisers Act.

2. The Client Hired Performance

In or about 1994, East West entered into an illegal kickback scheme with two trustees of the Client that allowed East West and the two trustees to profit from securities transactions executed by the Client's investment advisers. Pursuant to the scheme, the Client opened accounts with investment advisers that agreed to direct trades for the benefit of East West. East West would take a percentage of commissions on transactions, launder that money through foreign bank accounts, and give a portion of it to the two trustees.

In late 1994, one of the two trustees arranged for the Client to hire a consultant to add an appearance of legitimacy to the Client's selections of advisers and thereby conceal from the other Client trustees the kickback scheme with East West. The trustee learned that Performance, throughGolembo, would assist with the scheme by recommending to the Client cooperative investment advisers that the trustee had pre-selected.

Accordingly, the trustee recommended, and the Client hired, Performance as a consultant. In marketing Performance's services to the Client, Golembo misrepresented to the disinterested representatives of the Client that Performance would provide impartial recommendations concerning the selection of money managers. On multiple occasions after the Client hired Performance, Golembo represented that he based his recommendations on adviser performance and management, and he did not disclose to the disinterested representatives of the Client that he based his advice on whether an adviser would agree to direct brokerage to East West. Golembo recommended a particular investment adviser, Duff, knowing that Duff was willing to direct brokerage to East West. Golembo never disclosed to the disinterested representatives of the Client all the material reasons for his recommendation of Duff.

3. Performance Entered into an Arrangement with Duff

In or about the end of March 1996, after determining that it would not be able to guarantee the direction of a specific dollar amount of commission business for the benefit of East West and concluding that it would not be able to meet East West's demands for more commissions, Duff began to significantly reduce the amount of brokerage commissions it directed for the benefit of East West. During this same time period, Duff entered into a soft-dollar agreement with Performance, through Golembo, to encourage Performance's continued support of Duff's engagement by the Client. Duff agreed to direct $100,000 of brokerage commission business annually for the benefit of Performance's affiliated broker-dealer. In return, Performance agreed to continue to recommend that the Client retain Duff as a money manager. Duff directed at least $102,750 for the benefit of Performance's affiliated broker-dealer between July 1996 and July 1997.

After entering into the soft-dollar agreement with Duff and during the time when it was receiving brokerage commission business from Duff, Performance, through Golembo, continued to recommend Duff to the Client. Performance never disclosed to the disinterested representatives of the Client that it had a conflict of interest because it recommended an investment adviser that paid it fees.

C. Legal Analysis

1. Performance Willfully Violated Sections 206(1) and 206(2) of the Advisers Act

Sections 206(1) and 206(2) of the Advisers Act make it unlawful for any investment adviser, directly or indirectly, to employ any device, scheme or artifice to defraud, or to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Scienter is an element of a Section 206(1) violation, but not a Section 206(2) violation. Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979); Oakwood Counselors, Inc. and Paul J. Sherman, Advisers Act Rel. No. 1614 (February 10, 1997), 1997 SEC LEXIS 304 at *12; SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963).

The Supreme Court has interpreted Section 206 to impose a fiduciary duty on investment advisers, requiring an affirmative obligation of utmost good faith, and full and fair disclosure of all material facts to an investment adviser's clients. Capital Gains Research, 375 U.S. at 194. This fiduciary duty requires investment advisers to act for the benefit of their clients, Oakwood, 1997 SEC LEXIS 304 at *12 (citing Transamerica Mortgage Advisers, Inc., 444 U.S. 11, 17 (1979)), and precludes them from using their clients' assets to benefit themselves. Kingsley, Jennison, McNulty & Morse, Inc., Initial Decision Rel. No. 24 (November 14, 1991), 1991 SEC LEXIS 2587 at *9.

As a fiduciary, an investment adviser has a duty to disclose to clients "all material information which is intended `to eliminate, or at least expose,' all potential or actual conflicts of interest `which might incline an investment adviser consciously or unconsciously - - to render advice which is not disinterested.'" 1986 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170 (April 23, 1986), 1986 SEC LEXIS 1689(quoting Capital Gains Research, 375 U.S. at 191-92). See Kingsley, 1991 SEC LEXIS 2587 at *38. A fact is material if there is a substantial likelihood that a reasonable investor would consider it important. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc., et. al. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. Blavin, 557 F. Supp. 1304, 1313-15 (E.D. Mich. 1983), aff'd, 760 F.2d 706 (6th Cir. 1985) (per curiam) (materiality standard applied to Section 206 of Advisers Act). The standard of materiality is whether a reasonable client or prospective client would have considered the information important in deciding whether to invest with the adviser. See SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992). Information regarding an investment adviser's directed brokerage arrangements is material and must be disclosed to clients. Sheer Asset Management, Inc. and Arthur Sheer, Advisers Act Rel. No. 1459 (January 3, 1995), 1995 SEC LEXIS 10.

The Client hired Performance, an investment adviser, to act as a consultant in evaluating and selecting money managers. As a fiduciary to its client, Performance had a duty to disclose to its client all material information concerning potential or actual conflicts of interest, including information regarding its directed brokerage arrangements, which might have inclined Performance consciously or unconsciously to render advice which was not disinterested. Performance willfully violated Sections 206(1) and 206(2) of the Advisers Act by failing to disclose to the disinterested representatives of the Client: (1) its arrangement with a trustee of the Client to recommend advisers that had agreed to direct brokerage commission business for the benefit of East West; and (2) its soft dollar arrangement with Duff to continue to recommend Duff's advisory services in exchange for the direction of $100,000 per year in commissions to Performance's affiliated broker-dealer. Because he was a high-ranking officer of Performance, Golembo's conduct and knowledge can be imputed to Performance to establish its violations. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1096 n.16 (2d Cir. 1972).

2. Golembo Willfully Aided and Abetted and Caused Performance's Violations of Sections 206(1) and 206(2) of the Advisers Act

Section 203(f) of the Advisers Act authorizes the Commission to censure, suspend or bar any associated person of an investment adviser who has willfully aided, abetted, counseled, commanded,induced or procured a violation of the Advisers Act, and Section 203(i)(1)(B) gives the Commission the authority to impose a civil penalty on any such adviser or associated person.

The elements for aiding and abetting a violation of the federal securities laws include:

(1) a primary violation; (2) awareness or knowledge by the aider or abettor that he was participating in an improper activity; and (3) the aider or abettor knowingly and substantially assisted the conduct that constitutes the violation. Investors Research v. SEC, 628 F.2d 168, 178 (D.C. Cir.), cert. denied, 449 U.S. 919 (1980); Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799 (3d Cir.), cert. denied, 439 U.S. 930 (1979)(citing Gould v. American-Hawaiian Steamship Co., 535 F.2d 761, 779 (3d Cir. 1976)).

In order to demonstrate aiding and abetting liability, there must be proof offered to "establish conscious involvement in impropriety . . ." Monsen, 579 F.2d at 799 (citing Gould, 535 F.2d at 780). This involvement may be demonstrated "by proof that the alleged aider-abettor `had general awareness that his role was part of an overall activity that is improper.'" Monsen, 579 F.2d at 799 (citing SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974)). Recklessness satisfies the scienter element of aiding and abetting. Rolf v. Blyth, Easton Dillon & Co., Inc., 570 F.2d 38, 44-46 (2d Cir. 1978).

The substantial assistance element is satisfied where the respondent's actions are a "proximate" or "substantial causal factor" in bringing about the primary violation. See Russo Securities Inc. and Ferdinand Russo, Exchange Act Rel. No. 39181 (October 1, 1997), 1997 SEC LEXIS 2075, *17-18 ("proximate cause"); Rolf, 570 F.2d at 48 ("substantial causal factor"). The Commission need not show that the assistance rendered by the aider and abettor was "the sole cause or the principal cause; it need only be one of the causes." Carole L. Haynes, Initial Decision Rel. No. 78 (November 24, 1995), 1995 SEC LEXIS 3134 at *80.

As discussed above, Performance willfully committed primary violations of Sections 206(1) and 206(2) of the Advisers Act. Golembo willfully aided and abetted and caused Performance's violations because he knowingly and substantially assisted the conduct that constituted the violation and he knew or was reckless in not knowing that he was participating in an improper activity. Golembo, who was Performance's representative to the Client, substantially assisted Performance's violations because he: (1) entered into the arrangement with one of the Client's trustees to recommend only advisers who had agreed to direct brokerage to East West; and (2) entered into a soft dollar arrangement with Duff to continue to recommend Duff's advisory services to the Client in exchange for Duff's direction of brokerage commission business to Performance's affiliated broker-dealer. Golembo knew or was reckless in not knowing that the undisclosed arrangements violated Sections 206(1) and 206(2) of the Advisers Act. He further knew or was reckless in not knowing that Performance failed to disclose to the disinterested representatives of the Client the true reasons for Performance's recommendations concerning the selection and retention of money managers and the arrangement with Duff.

IV.

On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers of Settlement submitted by Performance and Golembo.

V.

Accordingly, IT IS ORDERED that:

A. Performance shall cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act;

B. Performance shall be, and hereby is, censured;

C. Performance shall be, and hereby is, prohibited from serving or acting as an investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter;

D. Performance shall pay a civil money penalty in the amount of $75,000 to the United States Treasury, to be paid under the following terms: $7,500 shall be paid within 30 days of the entry of this Order, and the balance shall be paid in nine monthly installments of $7,500 each, payable on the first day of each month following the initial payment. At the time of the last payment, Performance shall also pay post-judgment interest in the amount of $776.29. Such payments 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 Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (4) submitted under cover letter that identifies Performance 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 by certified mail to Juan M. Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108;

E. Performance shall comply with its undertaking as specified in its Offer of Settlement to perform and implement the following:

1. Within 30 days of the entry of this Order, Performance will provide to the staff and to each of its advisory clients an amended Form ADV, Part II, which discloses all material terms of any soft dollar arrangement it has with any broker-dealer.

2. Within 30 days of entry of this Order, Performance will provide a copy of this Order to all its current clients, together with a cover letter in a form not unacceptable to the Commission's staff. Performance shall use commercially reasonable efforts to obtain an acknowledgment of receipt from any client to whom the Order is delivered.

3. For a period of one year after the entry of this Order, Performance will provide a copy of this Order to all prospective clients not less than 48 hours prior to entering into any written or oral consulting or services contract (or no later than the time of entering into such contract if the client has the right to terminate the contract without penalty within five business days after entering the contract). Performance shall use commercially reasonable efforts to obtain an acknowledgment of receipt from any client or prospective client to whom the Order is delivered.

4. Within 60 days after the entry of this Order, Performance will file an affidavit with the Commission's staff, addressed to the attention of Juan M. Marcelino, District Administrator of the Commission's Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, setting forth the details of its compliance with the undertakings set forth in subparagraphs E.1 and E.2.

5. One year after the entry of this Order, Performance will file an affidavit with the Commission's staff, addressed to the attention of Juan M. Marcelino, District Administrator of the Commission's Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, setting forth the details of its compliance with the undertakings set forth in subparagraph E.3.

6. Performance shall comply with its undertaking as specified in its Offer of Settlement to perform and implement the following:

a. Performance shall retain, within 60 days of the date of this Order, at its expense, an Independent Consultant (the "Consultant") not unacceptable to the Commission staff. The Consultant shall conduct a review of Performance's supervisory, compliance and other policies and procedures designed to prevent and detect federal securities laws violations of the nature involved in this matter.

b. Performance shall provide to the Commission staff, within 60 days of the issuance of this Order, a copy of an engagement letter detailing the Consultant's responsibilities.

c. Performance shall cooperate fully with the Consultant, including providing the Consultant with access to its files, books, records and personnel as reasonably requested for the above-mentioned review, and obtaining the cooperation of Performance's employees or other persons under its control.

d. The Consultant shall report to the Commission staff on its activities as the staff shall request.

e. The Consultant may engage such assistance, clerical, legal or expert, as necessary and at reasonable cost, to carry out its activities and the cost, if any, of such assistance shall be borne exclusively by Performance.

f. Performance shall require the Consultant, at Performance's expense, to prepare a report making recommendations as to Performance's policies and procedures and system for applying such procedures as described in paragraph 6(a).

g. Performance shall require the Consultant to deliver the report to Performance and to the Commission staff within 120 days of the issuance of this Order.

h. Performance shall adopt all recommendations by the Consultant in the report within six months after its issuance; provided, however, that as to any of the Consultant's recommendations that Performance determines it is unduly burdensome or impractical, Performance may suggest an alternative procedure designed to achieve the same objective, submitted in writing to the Consultant and the Commission staff. The Consultant shall reasonably evaluate Performance's alternative procedure. Performance shall abide by the Consultant's determination with regard thereto and adopt such recommendations.

i. Performance will hold a mandatory meeting with all employees to review policies and procedures discussed in the Consultant's report within 60 days of issuance of the report. Attendance at the meeting will be recorded and a copy maintained in Performance's files.

j. Performance shall ensure that, for the period of the engagement and for a period of two years from the completion of the engagement, the Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Performance or any of its present or former affiliates, directors, officers, employees or agents acting in their capacity. Any firm with which the Consultant is affiliated or of which s/he is a member, and any person engaged to assist the Consultant in the performance of its duties under this Order shall not, without prior written consent of the Commission staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Performance or any of its present or former affiliates, directors, officers, employees or agents acting in their capacity as such for the period of engagement and for a period of two years from the completion of the engagement.

k. Performance shall designate or employ a director of compliance; shall define the duties of such officer; and shall ensure that such officer has access to Performance's board of directors and is subject to the direct supervision of, and reports to, Performance's chief executive officer. Such director of compliance shall be an individual with no Commission disciplinary history.

l. Performance shall, within nine months from the issuance of this Order, provide an affidavit by certified mail to Juan M. Marcelino, District Administrator, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, that it has complied with the undertakings in paragraphs 6(a) through 6(k). Such affidavit shall contain a statement describing the procedures adopted and implemented in compliance with paragraph 6(h). Such affidavit shall be submitted under cover letter which identifies Performance as the respondent in these proceedings, the file number and the Commission's case number. All other consultation with or reports to the Commission staff referenced in paragraphs 6(a) through 6(k) above shall also be directed to the attention of Juan M. Marcelino, District Administrator, Boston District Office, at the above address.

IT IS FURTHER ORDERED THAT:

F. Golembo shall cease and desist from committing or causing any violation and any future violation of Sections 206(1) and 206(2) of the Advisers Act;

G. Golembo shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $50,000 to the United States Treasury. Such payment 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 Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (4) submitted under cover letter that identifies Golembo 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 by certified mail to Juan M. Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108;

H. Golembo shall be, and hereby is, barred from association with any investment adviser, with a right to reapply for association after three years to the appropriate self-regulatory organization, or if there is none, to the Commission.

I. Golembo shall be, and hereby is, barred from association with any broker or dealer, with a right to reapply for association after one year to the appropriate self-regulatory organization, or if there is none, to the Commission.

J. Golembo shall be, and hereby 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.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes

1 The findings herein are made pursuant to Performance's and Golembo's Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.

2 "Soft dollar" practices generally describe arrangements whereby an adviser uses commission dollars generated by its advisory clients' securities trades to pay for research, brokerage, or other products, services or expenses. See S Squared Technology Corp., Advisers Act Rel. No. 1575, 62 SEC Docket 1560, 1561 (August 7, 1996). Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor from claims of breach of fiduciary duty for money managers who use the commission dollars of their advisory clients to acquire investment research and brokerage services, provided that all of the conditions of the section are met. 1986 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170 (April 23, 1986), 1986 SEC LEXIS 1689. The "safe harbor" provided by Section 28(e) does not excuse an adviser from its disclosure obligations; it merely excuses an adviser from obtaining the lowest available commission rate. The money manager has the burden of proving that it made a good faith determination that the value of the research and brokerage services is reasonable in relation to the amount of commissions paid. Id.

 

http://www.sec.gov/litigation/admin/34-46081.htm


Modified: 06/17/2002