UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37742 / September 27, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9113 ________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS, MAKING MICHAEL G. COHEN, : FINDINGS AND IMPOSING REMEDIAL : SANCTIONS Respondent. : ________________________ : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that administrative proceedings be instituted pursuant Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Michael G. Cohen ("Cohen"). In anticipation of the institution of these proceedings, Cohen has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding 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 contained herein, except for those set forth in subparagraphs II.A. and II.E. below, which are admitted, Cohen by his Offer consents to the findings and imposition of the sanctions contained in this Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions ("Order"). ==========================================START OF PAGE 2====== Accordingly, IT IS ORDERED that proceedings against Cohen be, and hereby are, instituted. II. On the basis of this Order and the Offer submitted by Cohen, the Commission finds that:-[1]- A. From March 1992 through April 1995, Cohen was employed as a registered representative with Philadelphia Investors, Ltd., a broker-dealer registered with the Commission since 1989. B. From March 1989 through April 1995, Cohen willfully violated Section 17(a) of the Securities Act of 1933 in that he, in the offer or sale of securities, namely, limited partnership interests, by the use of the means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly, employed devices, schemes or artifices to defraud; obtained money and property by means of untrue statements of material fact and 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; and engaged in transactions, practices or courses of business which would and did operate as a fraud and deceit upon the purchasers of such securities. C. As part of the conduct described in subparagraph II.B above: 1. Between March 1989 and September 1994, Cohen formed six limited partnerships to invest primarily in nationally listed stock options, as well as in stocks, bonds and other various derivative products. During this time period, Cohen raised approximately $500,000 from 32 investors through sales of interests in the partnerships. As the general partner for each partnership, Cohen made all investment decisions, performed all administrative functions, and controlled access to partnership funds. Under the terms of each partnership agreement, Cohen was to pool investor money raised in a particular offering and then, within his discretion, invest the funds accordingly. Each partnership agreement stated, among other things, that the partnership would terminate once the value of partnership interests declined 60 percent from the original offering price, thereby providing a limit to any potential loss. Cohen was entitled to a management fee from each partnership equal to 20 percent of the profits, if any. ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to Cohen's Offer and are not binding on any other person or entity named as a respondent in any other proceeding. ==========================================START OF PAGE 3====== 2. Cohen's options trading on behalf of each partnership ultimately produced massive losses. Rather than terminate a partnership once the value of its interests fell below the 60 percent limit, Cohen concealed the trading losses from the limited partners by creating fictitious monthly account statements and tax documents and mailing them to investors. The false account statements showed that the investment performance of each partnership exceeded that of the Standard and Poors' 500 index. 3. Cohen further created the appearance of successful options trading by sending investors periodic distributions which reflected the reported, but fictitious, profits. The source of these distributions was new investors funds raised from sales of interests in successive limited partnerships. The fraudulent account statements, tax documents and distributions encouraged investors to retain their limited partnership interests, thereby allowing Cohen to continue with his scheme. Cohen paid himself approximately $134,000 in commissions. 4. Cohen was able to partially pay investor distributions and his commissions by using the sporadic profits from his trading. However, as none of the partnerships ever enjoyed any sustained profitability, Cohen had to obtain ever- increasing sources of new investor money to fund his scheme. He raised additional funds by creating and selling interests in successive limited partnerships. Cohen deposited new investor money into brokerage and/or bank accounts and ultimately diverted the funds to the partnerships on a continuous, as-needed basis. Cohen attracted new investors by highlighting the fraudulent track-record of his partnerships. Cohen's scheme collapsed in April 1995 when his payment obligations and trading losses exceeded his ability to raise new capital. D. From March 1989 through April 1995, Cohen willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that he, in connection with the purchase or sale of securities, by the use of any means or instrumentalities 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 would and did operate as a fraud or deceit upon any person, as more fully described in subparagraphs II.C.1.- 4. above. E. In connection with the conduct described above, on September 13, 1995, Cohen pled guilty to one count of mail fraud in violation of Title 18, United States Code, Section 1341. U.S. v. ==========================================START OF PAGE 4====== Michael G. Cohen, Criminal No. 95-421 (E.D. Pa.). On January 18, 1996, Cohen was sentenced to 21 months in prison and was ordered to pay restitution of approximately $471,000. ==========================================START OF PAGE 5====== III. On the basis of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Cohen and impose the sanctions specified therein. Accordingly, IT IS HEREBY ORDERED THAT Cohen be, and hereby is: Barred from association with any broker, dealer, municipal securities dealer, investment advisor or investment company. By the Commission. Jonathan G. Katz Secretary