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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. 47266/January 28, 2003

INVESTMENT ADVISERS ACT OF 1940
Release No. 2104/January 28, 2003

ADMINISTRATIVE PROCEEDING
FILE NO. 3-10931


In the Matter of

DENNIS S. HERULA

Respondent.


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ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS BY DEFAULT

The Securities and Exchange Commission (Commission) instituted this proceeding pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) and Section 203(f) of the Investment Advisers Act of 1940 (Advisers Act), on November 8, 2002, with an Order Instituting Proceedings (OIP). On January 24, 2003, the Division of Enforcement (Division) filed a Motion That Respondent Dennis S. Herula Be Found In Default and That An Order Making Findings and Imposing Remedial Sanctions Be Entered Against Him (Motion), for Respondent's failure to file an answer to the OIP in accordance with Rule 220(f) of the Commission's Rules of Practice, 17 C.F.R. § 201.220(f). The Motion, filed pursuant to Rule 155(a) of the Commission's Rules of Practice, 17 C.F.R. § 201.155(a), seeks an order barring Respondent from association with any broker or dealer and from any investment adviser.

Respondent is in default under Rules 155(a) and 220(f) of the Commission's Rules of Practice, 17 C.F.R. §§ 201.155(a), .220(f), because he failed to answer the OIP, or to respond to my December 13, 2002, Order to Show Cause. Accordingly, I find the allegations in the OIP to be true:

Respondent was a registered representative with Raymond James Financial Services, Inc. from on or about August 24, 1999, to on or about January 4, 2001. Respondent is the president and registered agent of Legacy 2000 Associates, Inc. (Legacy 2000). Respondent, 55 years old, maintains residences in Tiburon, California, Westerly, Rhode Island, and Warwick, Rhode Island.

Legacy 2000 has been incorporated in the State of California since January 25, 2001, and it has been registered as an investment adviser with the State of California from March 21, 2001, to the present. Legacy 2000's registered office is 95 Spring Lane in Tiburon, California. It has never been registered with the Commission as an investment adviser.

On April 1, 2002, the Commission filed a complaint in the U.S. District Court for the District of Rhode Island against Herula and others, based on alleged violations of certain provisions of the federal securities laws in a civil action entitled Securities and Exchange Commission v. Dennis S. Herula, et al., Civil Action Number 02-154 ML. The complaint alleged that Respondent participated in a fraudulent scheme that raised approximately $52 million by falsely promising investors exorbitant returns and misappropriating investor funds. According to the Commission's complaint, Respondent played an integral role in the scheme by making false statements to investors, providing forged account statements to investors, and misappropriating approximately $8 million in investor funds.

On October 10, 2002, the court orally granted the Commission's motion for entry of final judgment by default against Herula. On October 17, 2002, the court issued a memorandum and order against Respondent, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Respondent was ordered to pay disgorgement, along with prejudgment interest, in the total amount of $18,941,665.63, and was assessed a civil monetary penalty in the amount of $250,000.

In its October 17, 2002 memorandum and order, the court found that: Herula made intentional misrepresentations to investors concerning investments, including misrepresenting the nature of an investment program, its overall risk and status of funds; Herula sent an investor's representative forged brokerage account statements; Herula admitted that he created false documents on the stationery of a brokerage firm, indicating that an account was frozen, when in fact it was never frozen; Herula misled another investor by guaranteeing him a return of at least 10% per month with a promise that the principal would be returned within a year. Herula also made various false representations to that investor regarding the status of his investment.

The court also found that Herula and his wife controlled $16,733,520.83 in funds that were invested with the various defendants in the action and $8,731,776.95 of that could be traced to their personal accounts. Approximately $6 million of investor funds were transferred to accounts controlled by Herula and/or his wife and were used by them to purchase personal items such as jewelry, art, antiques, and real estate.

The court concluded that Herula is liable for disgorgement in the amount of $18,941,665.63, which represents the $16,733,520.83 that came under his control, plus prejudgment interest in the amount of $2,208,144.80, and that a civil monetary penalty in the amount of $250,000 is warranted against Herula because of the egregiousness of his conduct in spending investor funds on an assortment of luxury items, including jewelry, art, cars, trips, and expensive meals.

In light of the allegations brought in the OIP, and Respondent's failure to answer the OIP, and to respond to the December 13, 2002, Order to Show Cause, I find it is necessary and appropriate for the protection of investors to order that Respondent Herula be barred from association with a broker or dealer pursuant to Section 15(b) of the Exchange Act and from association with any investment adviser pursuant to Section 203(f) of the Advisers Act.

Accordingly, IT IS ORDERED, that the following sanctions be imposed pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940:

Dennis S. Herula is BARRED from association with any broker or dealer and from association with any investment adviser.

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Lillian A. McEwen
Administrative Law Judge

 

http://www.sec.gov/litigation/admin/34-47266.htm


Modified: 02/24/2003