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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. 47751 / April 29, 2003

Administrative Proceeding
File No. 3-11096


 

In the Matter of

BARON CAPITAL, INC.,
RONALD S. BARON,
DAVID SCHNEIDER, and
SUSAN BLENKE,

Respondent.  


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ORDER INSTITUTING ADMINISTRATIVE
AND CEASE-AND-DESIST PROCEEDINGS,
MAKING FINDINGS, AND IMPOSING
REMEDIAL SANCTIONS PURSUANT TO
SECTIONS 15(b) AND 21C OF THE SUSAN BLENKE,
SECURITIES EXCHANGE ACT OF 1934

I.

The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Baron Capital, Inc. ("Baron Capital"), Ronald S. Baron ("Baron"), David Schneider ("Schneider"), and Susan Blenke ("Blenke") (collectively, the "Respondents").

II.

In anticipation of the institution of these administrative proceedings, the Respondents have submitted Offers of Settlement (the "Offers"), 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 them and the subject matter of these proceedings which are admitted, the Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.

III.

FINDINGS

On the basis of this Order and Respondents' Offers, the Commission finds that:

FACTUAL FINDINGS

Summary

This case involves unlawful "marking the close" by Baron Capital in securities trades executed on the floor of the New York Stock Exchange ("NYSE"). Baron Capital influenced the closing price of stock in Southern Union Company ("SUG") by ordering the execution of purchase orders in SUG at or near the close of the market during a period when the closing price of SUG determined the consideration paid by SUG in consummating a pending corporate acquisition. Baron, the CEO of Baron Capital, instructed Baron Capital's traders to purchase the stock. Schneider and Blenke, Baron Capital traders, placed the orders with a broker-dealer on the NYSE floor. Respondents'

A.trading affected the closing price of SUG.

Respondents

B. Baron Capital, a member of the National Association of Securities Dealers ("NASD"), is owned by Baron Capital Group, Inc., a holding company owned principally by Baron and his family. Baron Capital is a broker-dealer for several of its affiliated investment advisory firms ("Baron affiliates"). During the relevant period, the Baron affiliates had approximately $8.6 billion under management. Baron Capital is based in New York, New York, and has been registered with the Commission as a broker-dealer since 1982.

C. Baron, 59, is and at all relevant times was the CEO of Baron Capital.

D. Schneider, 42, is and at all relevant times was the head trader at the Baron Capital trading desk. Schneider holds Series 7, 55, and 63 licenses. Schneider has worked in the securities field since 1984 and at Baron Capital since 1987. He has been a trader at Baron Capital since the early 1990s.

E. Blenke, 33, was at all relevant times a trader working directly with Schneider at the Baron Capital trading desk. During the relevant period, she held Series 7 and 55 licenses. Blenke was employed at Baron Capital beginning in 1991, and worked as a trader from 1993 throughout the relevant period. Blenke currently works at Baron Capital in the area of computer applications.

Respondents "Marked the Close" of a Stock

F. Southern Union Company is a natural gas utilities operation based in Austin, Texas. The company's common stock at all relevant times was traded on the NYSE under the symbol "SUG."

G. The Baron affiliates began investing in SUG on behalf of their clients in 1995. From the beginning of 1995 through the end of 1998, client accounts managed by the Baron affiliates acquired 1,745,242 shares of SUG. Between January 1, 1999 and October 15, 1999, these client accounts acquired an additional 1,763,526 shares of SUG at an average price of $19.68. As of October 15, 1999, the client accounts managed by the Baron affiliates owned more than 10% of SUG's outstanding shares. These shares represented less than 1% of the assets managed in the accounts at issue.

H. On June 7, 1999, SUG and Pennsylvania Enterprises ("PNT") announced the terms of a planned merger. According to the proposed merger terms, when the merger closed, PNT's shareholders would exchange their PNT shares for shares of SUG stock and cash. The number of SUG shares and amount of cash which PNT shareholders would receive depended upon the average closing price of SUG's stock for the ten consecutive trading days ending on the third day before the closing date (the "pricing period"). The merger agreement set up four distinct pricing tiers that provided for different ranges of possible average closing prices and designated different amounts of stock and cash for each range. Between $17.30 per share and $22 per share the total consideration was fixed at $35 per share, and the mix between stock and cash was to be determined based on the average closing price of SUG during the pricing period. The four tiers were set up such that the lower SUG's average closing price during the pricing period, PNT shareholders would receive from SUG proportionately more cash and less SUG stock in order to achieve the promised $35 total value; conversely, the higher the average closing price, PNT shareholders would receive from SUG proportionately more SUG stock and less cash. If the average closing price during the pricing period was less than $17.30, PNT had the right to terminate the merger.

I. On September 17, 1999, SUG announced that it expected to secure all necessary regulatory approvals for the merger by the beginning of November 1999, at which time the merger would close. The price of SUG hit a six-month low of $17.625 per share on the morning of October 18, 1999. The pricing period, which was set on November 4, 1999, began on October 19 and ended on November 1, 1999.

J. On October 18, 1999 and during the pricing period, Baron directed Schneider and Blenke to purchase large amounts of SUG on behalf of client accounts managed by the Baron affiliates. The purchase orders generally were in the form of limit orders. Many of the SUG purchases occurred at or near the end of each trading day during the pricing period. A purpose of these end-of-day purchases was to raise the average closing price of SUG during the pricing period.

K. Baron, Schneider and Blenke engaged in numerous telephone conversations in which they discussed Baron Capital's purchases of SUG during the pricing period. For example, on the morning of October 22, 1999, Baron instructed Blenke to "do your buying today, and the end of the day, just buy [SUG] up into the twenties. . . . You know, 20 ¼, 20 ½, something like that." Baron explained that Blenke should "[u]se the 20 ½ top at the end of the day . . . like the last half-hour or something like that." Blenke responded affirmatively. Later on the same day, at approximately 12:20 p.m., Baron told Schneider that he "would like to see [SUG] a little bit higher here. . . . About 20 ¼, 20 ½, something like that." At the time, SUG was trading at $19.8125 per share. Schneider asked, "How many more days of this do we have to go?" Baron responded, "Well this is four days so far. . . . Let's see that's 15, the 18th, 19th, 20th, 21st, this is the fifth day. That's fifteen days." Schneider then asked, "Okay, and it's the closing price that matters, right?" "Yeah, exactly," Baron replied.

L. Also on October 22, 1999, Schneider told another Baron Capital employee that Baron "wants it to close at 20 and ½ today." Schneider further explained that "there's a deal, and the, the lower it goes, the more [Baron] gets diluted.... [H]e'd like it to close at 20 and ½." Referring to the pricing period, Schneider added, "he's gonna buy this thing for 10 days, and he's already bought it for the last 4 or 5 days. . . ." Later that day, Baron Capital purchased 49,600 shares of SUG during the last twenty minutes of the trading day - including 15,000 shares at 4:00 p.m. - at increasingly higher prices ranging from $20 to $20.50 per share. SUG closed for the day at $20.50 per share on Baron Capital's purchase.

M. Pursuant to Baron's direction, Schneider and Blenke instructed the brokerage firm clerks with whom they placed their orders to execute many of Baron Capital's purchases of SUG at or near the close of trading during the pricing period, which influenced SUG's closing price. For example, on October 22, 1999, in placing an order to buy SUG, Blenke instructed the order clerk, "by the end of the day, buy 34,600 up to 20½." The clerk responded, "You want to take it up to 20½?" Blenke said "Yup," and noted moments later that " I had trouble yesterday when it didn't close where I wanted it to close so make sure it closes. . . ." The clerk asked, "Where do you want [it], where would you like it to close ultimately?" Blenke responded "20 and ½." The clerk confirmed, "You would like it to close up there, OK." Later that day, near the close of the market, the order clerk telephoned Blenke to ask "Do you want it to be shown a [sic] close at a half or do you want it shown a half bid close." Blenke responded, "I think he wants it to close at a half." The order clerk repeated, "Close at a half. The last sale a half. So I can leave it at a quarter [bid] and 5/8 [ask]." Blenke then confirmed, "Yes, he'd be alright with that." The order clerk telephoned Blenke again, saying, "Give me some more Sugar to buy. Somebody came in through the system with 16,000." Blenke's immediate response was to provide the order clerk with the authority to buy an additional 10,000 shares of SUG at $20.50 per share. As described above, SUG closed at $20.50 per share on October 22, 1999 on Baron Capital's purchase.

N. On October 26, the order clerk called the Baron traders to report that someone had placed an order to sell SUG at $20 & 7/16 and that it prevented him from closing SUG at 20 & ½. The order clerk told Blenke and Schneider, "with the overlay in the sugar, I can't seem to get it up to a half, 7 teenies is the close, I have to do it that." "That's fine," Blenke responded.

O. During the five business days beginning on October 20, the largest single purchase of SUG by Baron Capital for each and every business day was either ordered or executed at 3:59 or 4:00 p.m., when the NYSE closes. Baron Capital was the closing trade for 7 of the 10 days of the pricing period. On the three other days during the pricing period, the closing trade was either the same as or higher than Baron Capital's last purchase of SUG.

P. SUG's average daily trading volume during the two weeks preceding the pricing period was 19,530 shares per day, and during the pricing period it was 70,230 shares per day. Baron Capital's purchases made up approximately 78% of the volume during the pricing period.

Q. The average closing price of SUG during the pricing period was $20.125 per share, placing the merger within the second-highest pricing tier. In contrast, the average closing price of SUG during the ten business days immediately prior to the pricing period was $18.55 per share. That price was only $1.25 above the price that would have enabled PNT to cancel the merger and, if it had been the average closing price during the pricing period, would have required SUG to pay millions more in cash (instead of SUG stock) to the PNT shareholders than SUG paid based on the actual $20.125 average close.

R. Baron Capital paid, on average, $20.07 per share for the 529,750 SUG shares it purchased during the pricing period. During 1999 after the pricing period ended, Baron Capital continued purchasing SUG, accumulating an additional 557,632 shares of SUG at an average price of $19.19. The Baron affiliates' client accounts continue to hold virtually all of the SUG stock purchased for their accounts from 1995 through 1999.

LEGAL FINDINGS

Baron Capital Violated Section 15(c)(1)(A) of the Exchange Act

S. Section 15(c)(1)(A) of the Exchange Act prohibits brokers and dealers from using "any manipulative, deceptive, or other fraudulent device or contrivance" in connection with securities transactions. 15 U.S.C. § 78o(c). This section applies to "transactions on exchanges where the broker-dealer is not a member."1 Asch v. Philips, Appel & Walden, Inc., 867 F.2d 776, 777 (2d Cir. 1989). Rule 15c1-2 defines the phrase "manipulative, deceptive, or other fraudulent device or contrivance" as "any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person." 17 C.F.R. 240.15c1-2.

T. "`Marking the close' is the practice of attempting to influence the closing price of a stock by executing purchase or sale orders at or near the close of the market." In the Matter of the Application of Thomas C. Kocherans, 60 S.E.C. Docket 2210 (1995). Marking the close is a manipulative practice within the meaning of the federal securities laws. Id.

U. By virtue of the conduct described above, Baron Capital marked the close of SUG.

V. Accordingly, Baron Capital willfully violated Section 15(c)(1)(A) of the Exchange Act.

Baron, Schneider and Blenke Aided and Abetted and Caused
Baron Capital's Violations of Section 15(c)(1)(A) of the Exchange Act

W. "The three elements necessary to find aiding and abetting [liability] are: (1) securities law violations by another party; (2) substantial assistance by the aider and abettor in the conduct constituting those violations and (3) general awareness or knowledge by the aider and abettor that his actions were part of a course of conduct that is illegal or improper." In the Matter of Richard D. Chema, 68 S.E.C. Docket 1911 (November 30, 1998). A respondent may be held liable as a "cause" of a primary violation for purposes of a cease-and-desist proceeding if the respondent "knew or should have known" that his act or omission would contribute to such violation. Id. at n.20.

X. By virtue of the conduct described above, Baron aided and abetted and caused Baron Capital's violation of Section 15(c)(1)(A). As also described above, Schneider and Blenke aided and abetted and caused Baron Capital's violation of Section 15(c)(1)(A).

CONCLUSION

Y. Based on the foregoing, the Commission finds that Baron Capital willfully violated Section 15(c)(1)(A) of the Exchange Act. The Commission further finds that Baron, Schneider and Blenke willfully aided and abetted and caused Baron Capital's violations of Section 15(c)(1)(A) of the Exchange Act.

UNDERTAKINGS

Z. Respondent Baron Capital has undertaken to enact and to maintain permanently certain new policies and procedures as set forth in a document entitled "Baron Capital, Inc. Trading Procedures: End of Day Trading" that Baron Capital has provided to the Commission staff. These new policies and procedures shall be carried out under the direction of a new compliance officer hired by Baron Capital and shall be effective as of the date of this Order.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers.

ACCORDINGLY, IT IS HEREBY ORDERED that:

A. Pursuant to Section 21C of the Exchange Act, Respondents Baron Capital, Baron, Schneider and Blenke shall cease and desist from committing or causing any violations and any future violations of Section 15(c)(1) of the Exchange Act;

B. Pursuant to Section 15(b)(4) of the Exchange Act, Respondent Baron Capital shall be censured, and pursuant to Section 15(b)(6) of the Exchange Act, Respondents Baron, Schneider and Blenke shall be censured;

C. Respondent Baron Capital shall, within 20 days of the entry of this Order, pay a civil money penalty in the amount of $2,000,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies Baron Capital, Inc. 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 to Mark K. Schonfeld, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, Northeast Regional Office, 233 Broadway, New York, N.Y. 10279;

D. Respondent Baron shall, within 20 days of the entry of this Order, pay a civil money penalty in the amount of $500,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies Ronald S. Baron 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 to Mark K. Schonfeld, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, Northeast Regional Office, 233 Broadway, New York, N.Y. 10279;

E. Respondent Schneider shall, within 20 days of the entry of this Order, pay a civil money penalty in the amount of $125,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies David Schneider 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 to Mark. K. Schonfeld, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, Northeast Regional Office, 233 Broadway, New York, N.Y. 10279; and

F. Respondent Blenke shall, within 20 days of the entry of this Order, pay a civil money penalty in the amount of $75,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies Susan Blenke 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 to Mark K. Schonfeld, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, Northeast Regional Office, 233 Broadway, New York, N.Y. 10279.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

1 Because Baron Capital is not a member of the NYSE, where SUG was listed, Baron Capital's conduct falls within Section 15(c)(1).

 

http://www.sec.gov/litigation/admin/34-47751.htm


Modified: 04/29/2003