United States of America
In the Matter of
Daniel L. Springate
|ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934|
The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Daniel Lamont Springate ("Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "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 findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds that:1
A. These proceedings arise out of violations of the net capital, books-and-records and financial reporting provisions of the Exchange Act by Harrison Securities, Inc. ("Harrison"), a registered broker-dealer owned and controlled by Frederick C. Blumer ("Blumer"). From April 2001 through April 2002, Harrison repeatedly conducted a securities business while not maintaining sufficient net capital. During that period, Harrison was out of net capital on numerous occasions and filed several inaccurate Financial and Operational Combined Uniform Single Reports ("FOCUS reports").
B. From April 1, 2001 through August 22, 2001, on at least eight occasions, as a result of actions by Blumer and Springate, Harrison conducted a securities business while not maintaining sufficient net capital. Harrison improperly calculated its net capital and had a net capital deficiency because, among other things, the firm: (1) failed to record accurately and timely on its books and records certain cash receipts and disbursements; (2) failed to record accurately and timely on its books and records certain liabilities; (3) used an incorrect minimum net capital amount when calculating its net capital, and failed to deduct haircut and, when appropriate, undue concentration charges; and (4) made frequent transfers of cash to Blumer and HSI Inc., a/k/a HSI, an entity owned and controlled by Blumer. One of the improper net capital computations was reflected in a FOCUS report Harrison filed with the NASD during the relevant period. Harrison also failed to provide notice to the Commission of its net capital deficiencies and inaccurate books and records.
C. By operating without sufficient net capital, Harrison violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1(a) thereunder. In addition, by filing inaccurate FOCUS reports and failing to create and preserve current accurate books and records, Harrison violated Section 17(a)(1) of the Exchange Act and Rules 17a-3(a), 17a-4(a) and (f), and 17a-5(a) thereunder. By failing to file notice with the Commission of its net capital deficiencies and its failure to keep current books and records, Harrison violated Section 17(a)(1) of the Exchange Act and Rules 17a-11(b) and (d) thereunder. Finally, Springate was a cause of certain of the firm's violations.
D. Daniel Lamont Springate, age 59, founded DL Springate Securities, a registered broker-dealer, in 1983. Springate sold DL Springate Securities to Blumer in April 2000, after which Blumer changed the firm's name to Harrison. Springate remained as Harrison's registered financial and operations principal ("FINOP") through August 22, 2001. In the eight years before hefounded DL Springate Securities, Springate worked at seven broker-dealers. Springate resides in Sierra Madre, California.
E. Harrison Securities, Inc., f/k/a DL Springate Securities, is a registered broker-dealer located in Port Washington, New York. Harrison has been registered with the Commission since 1983, and is a member of the NASD. Harrison employs approximately 125 registered representatives and services approximately 4,000 retail accounts. Harrison acts as an introducing broker, effecting securities transactions on a fully disclosed basis through a clearing broker. On March 5, 2002, Harrison settled a regulatory action with the NASD, in which it consented, without admitting or denying the allegations, to findings that it failed to maintain sufficient net capital while engaging in the securities business and agreed to pay a $2,500 fine.
F. HSI, is a New York corporation founded, owned and controlled by Blumer. HSI purportedly was formed to serve as paying agent for Harrison. HSI is not registered with the Commission in any capacity and is not a member of any self-regulatory organization.
G. Blumer, age 49, is, and at all relevant time was, the sole shareholder, CEO, president, and compliance officer of Harrison. Blumer controlled all of Harrison's operations, prepared and maintained all of Harrison's books and records, including its general ledger and its trial balances, and prepared and filed, or caused to be filed, all of Harrison's periodic reports with the Commission. Blumer is, and at all relevant times was, a certified public accountant, licensed in the state of New York.
H. Section 15(c)(3) of the Exchange Act and Rule 15c3-1(a) thereunder require a broker-dealer to maintain minimum net capital while conducting a securities business. As an introducing broker that does not clear trades or carry customer accounts, Harrison was required at all relevant times to maintain a minimum net capital of the greater of 6-2/3 percent of its aggregate indebtedness, or $5,000. Harrison was also required to prepare monthly net capital computations pursuant to Exchange Act Rule 17a-3(a)(11), and file quarterly FOCUS reports, which include its monthly net capital calculations, pursuant to Exchange Act Rule 17a-5(a).
I. For the quarter ending June 30, 2001, Harrison filed a FOCUS report which stated that it had sufficient net capital. On this date, however, Harrison in fact had a net capital deficiency.
J. In addition, Harrison's books and records reflect that the firm had excess net capital on April 2, 2001, April 3, 2001, May 31, 2001, June 1, 2001, June 28, 2001, June 29, 2001, July 3, 2001, and July 31, 2001. On each of these dates, however, Harrison in fact had a net capital deficiency.
K. The net capital deficiencies set forth in paragraphs I. and J., above, arose from one or more of the following errors by Blumer:
1. Blumer improperly recorded deposits in Harrison's cash receipts blotter prior to the actual receipt of funds into Harrison's bank account. This practice increased the firm's assets on Harrison's books and records and made it appear that it was in compliance with its net capital requirement, when in fact it was not.
2. Blumer improperly accrued Harisson's expenses either by not accruing an expense when it was incurred, as required under generally accepted accounting principles ("GAAP"), or by removing liabilities from the firm's books and records before they were paid, which is also improper under GAAP. By improperly accruing Harrison's expenses and removing its liabilities from the firm's books and records before they were paid, Blumer understated Harrison's liabilities and thus overstated its net capital.
3. Blumer improperly delayed recording cash disbursements on Harrison's cash disbursements blotter. On several occasions, Blumer wrote checks prior to the end of the month, before Harrison's month-end net capital computation, but did not record these checks in the firm's cash disbursements blotter until the beginning of the next month. By waiting until after computing its net capital to record the disbursement, Blumer improperly inflated Harrison's assets.
4. Blumer improperly used the lower of two possible minimum net capital amounts when computing Harrison's net capital. Harrison was required to maintain a minimum net capital of the greater of $5,000 or 6-2/3 percent of its aggregate indebtedness. In the quarter in which Harrison filed its FOCUS report, Blumer used the amount of 6-2/3 percent of Harrison's aggregate indebtedness when computing its net capital. However, for the months in which Harrison did not file a FOCUS report, Blumer used $5,000 as the firm's minimum net capital requirement. Because 6-2/3 percent of Harrison's aggregate indebtedness was always greater than $5,000, Blumer's use of $5,000 as Harrison's minimum net capital requirement was improper, and made it appear as if the firm's net capital was greater than it actually was.
5. Blumer failed to deduct haircut and, when appropriate, undue concentration charges in calculating Harrison's monthly net capital in the months in which Harrison did not file a FOCUS report. Blumer's failure to deduct haircuts and undue concentration charges, when required, was a contributing factor to Harrison's net capital deficiencies on at least 9 occasions.
L. Another cause of Harrison's net capital deficiencies was Blumer's practice of transferring funds out of the firm after computing the firm's net capital. On numerous occasions, shortly after calculating or reporting that Harrison had excess net capital for a given month or quarter, Blumer transferred money to HSI or directly to himself, usually in an amount greater than Harrison's claimed excess capital, thereby putting the firm out of net capital compliance. Several weeks later, and prior to the next monthly net capital computation, Blumer transferred cash back to Harrison from either HSI or himself in order to increase -temporarily the firm's allowable assets, thereby seemingly satisfying the firm's net capital requirement. When Harrison no longer needed the funds for computing its net capital, Blumer would again withdraw the funds.
M. Harrison effected securities transactions on a continuous basis during the period from April 1, 2001 through August 22, 2001.
N. Section 17(a)(1) of the Exchange Act and Rule 17a-3(a) thereunder require that every registered broker-dealer make and keep current general ledgers, cash receipts and disbursements blotters, trial balances, and computations of aggregate indebtedness and net capital.
O. The errors set forth in paragraph K. above caused Harrison's general ledgers, cash receipts and disbursements blotters, trial balances, and computations of aggregate indebtedness and net capital to be inaccurate.
P. Harrison created and maintained its general ledger in a computerized format, but failed to preserve it for the period prior to October 1, 2001. Harrison therefore violated Section 17(a)(1) of the Exchange Act and Rule 17a-4(a) thereunder, in that having elected to maintain and preserve its general ledger by means of electronic storage media, it failed to do so in a non-rewriteable, non-erasable format in accordance with Rule 17a-4(f)(2).
Q. Harrison also failed to store separately from the electronically stored original, a duplicate copy of its general ledger. Accordingly, Harrison violated Section 17(a)(1) of the Exchange Act and Rule 17a-4(f)(3) thereunder, because the firm did not store separately from the original, a duplicate copy of its records that were originally stored as electronic storage media.
R. Section 17(a)(1) of the Exchange Act and Rules 17a-11(b) and (d) thereunder require every broker or dealer who fails to make or keep current the books and records required by Rule 17a-3, or whose net capital falls below the minimum required amount, to give notice that same day to the Commission.
S. Harrison failed timely to send the required notice regarding Harrison's net capital deficiencies and inaccurate books and records. Harrison should have filed notice that it was not maintaining sufficient net capital and that its books and records were inaccurate as soon as it became aware of these deficiencies. Beginning as early as April 2001, Harrison was notmaintaining sufficient net capital and its books and records were inaccurate. However, Harrison did not file any such notice until July 25, 2002.
T. As Harrison's FINOP during the period April 1, 2001 through August 22, 2001, Springate was responsible for the preparation of all financial reports and supervision of those that assisted in the preparation of such reports and the maintenance of the firm's books and records, and was charged with final approval of and responsibility for the firm's net capital computations. Rule 1022(c)(2) of Schedule C of the NASD By-Laws, NASD Manual at 3174 (2001). See also Joseph S. Barbera, Exchange Act Release No. 43528 (Nov. 7, 2000) (FINOP has the responsibility to accurately maintain the firm's books and records, including its general ledger, in compliance with Exchange Act Rules); Gilad J. Gevaryahu, Exchange Act Release No. 33038 (Oct. 12, 1993) (FINOP's obligation to supervise and/or perform "the member's responsibilities under all financial responsibility rules promulgated pursuant to the provisions of the Securities Exchange Act of 1934" is not lessened or excused because he worked for the firm only on a part-time basis). However, Springate failed to fulfill his responsibility as FINOP because he failed to review adequately the documentation supporting the assets reflected in Harrison's books and records, net capital computations and FOCUS report, or the source documentation for Harrison's liabilities to ensure that the firm's liabilities reflected in its books and records, net capital computations and FOCUS report were accurate and accrued in accordance with GAAP. Had he properly reviewed Harrison's books and records and net capital computations and the supporting documents, Springate would have known that Harrison's books and records and net capital computations were inaccurate, and that notice of the net capital deficiencies and books-and-records inaccuracies was required.
U. As alleged in paragraphs A. through M. above, Harrison willfully violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1(a) thereunder, in that, by use of the mails, or means or instrumentalities of interstate commerce, Harrison effected transactions in, or induced or attempted to induce the purchase or sale of, securities (other than an exempted security (except a government security) or commercial paper, bankers' acceptances or commercial bills) in contravention of the rules and regulations prescribed by the Commission as necessary or appropriate in the public interest for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers.
V. As alleged in paragraphs A. through G. and N. through Q. above, Harrison willfully violated Section 17(a)(1) of the Exchange Act and Rules 17a-3(a), 17a-4(a) and (f), and 17a-5(a), respectively, which require registered brokers and dealers to make and keep current, and preserve, books and records relating to their brokerage business, and to make certain reports and filings with the Commission.
W. As alleged in paragraphs A. through G. and R. through S. above, Harrison willfully violated Section 17(a)(1) of the Exchange Act and Rule 17a-11(b) which require that every registered broker or dealer whose net capital falls below the minimum amount required by Rule 15c3-1(a) to give telegraphic or facsimile notice of such deficiency that same day to the Commission.
X. As alleged in paragraphs A. through G. and R. through S. above, Harrison willfully violated Section 17(a)(1) of the Exchange Act and Rule 17a-11(d) which requires every broker or dealer who fails to make and keep current the books and records required by Rule 17a-3(a) to give notice to the Commission of the fact that same day.
Y. As alleged in paragraphs A. through T. above, Springate was a cause of Harrison's violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1(a), 17a-3(a), 17a-4(a) and (f), 17a-5(a), 17a-11(b) and 17a-11(d) thereunder that occurred during the period April 1, 2001 through August 22, 2001.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent Springate's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED:
Pursuant to Section 21C of the Exchange Act, that Respondent Springate cease and desist from committing or causing any violations and any future violations Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1(a), 17a-3(a), 17a-4(a) and (f), 17a-5(a) and 17a-11(b) and (d) promulgated thereunder.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
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