Release No. 1811 / August 2, 1999
ADMINISTRATIVE PROCEEDING
File No. 3-9953
| In the Matter of Energy Equities Inc. and David G. Snow Respondent. |
ORDER INSTITUTING PROCEEDDINGS PURSUANT TO SECTIONS 203(e), 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A 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), 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Respondents Energy Equities, Inc. ("EEI") and David G. Snow ("Snow) (the "Respondents").
In anticipation of the institution of these administrative proceedings, Respondents have submitted a joint Offer of Settlement ("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 in which the Commission is a party, and without admitting or denying the findings herein, except that Respondents admit the Commission's jurisdiction over them and over the subject matter of these proceedings, Respondents have consented to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist order as set forth below.
II.
On the basis of this Order and the Offer submitted by Respondents, the Commission finds that:
A. EEI (No. 801-41472), a New Jersey corporation, was registered as an investment adviser under the federal securities laws between May 1992 and June 1, 1998. On June 1, 1998, EEI withdrew its federal registration pursuant to Section 203(h) of the Advisers Act and Rule 203-2 thereunder.
B. Snow is a resident of Wayne, New Jersey, and is the president and sole owner and employee of EEI.
C. Since 1996, EEI has written and published approximately 50 analyst reports covering at least 13 issuers, most of whom are involved in the oil, mineral, and mining industries. These reports included reports recommending the purchase of the securities of Naxos Resources Ltd. ("Naxos") and Solv-Ex Corporation ("Solv-Ex"). EEI sends the reports directly to its clients, most of whom are institutional investors, such as mutual funds and money managers.
D. On March 1, 1995, Naxos, a Canadian public company, contracted to pay Snow a finder's fee equal to five percent of funds invested by persons Snow introduced to Naxos who participated in a private placement or other new financing. Between April 1995 and August 1997, Snow introduced investors to Naxos who invested a total of $528,803. Naxos paid Snow $5,190 in 1995 and $21,250 in 1997, for a total finder's fee of $26,440. Further, on March 28, 1995, Naxos issued to Snow a two-year option for 50,000 shares of Naxos stock in exchange for Snow's agreement to introduce the company to investors.
E. Snow bought and sold Naxos and Solv-Ex stock during the period that EEI recommended those stocks to its clients. In 1995, Snow accumulated in excess of 130,000 shares of Naxos stock through private placement and market purchases. Between January 30 and March 13, 1996, Snow purchased 2,300 shares of Solv-Ex stock on the open market.
F. EEI made no disclosure in any reports recommending securities to clients or prospective clients with respect to the receipt or possible receipt by EEI or a related person of finder's fees or other compensation from issuers, the securities of which EEI recommended. Moreover, EEI and Snow never amended EEI's Form ADV to disclose such information.
G. EEI's Form ADV filed in 1992, its initial report on Naxos dated February 1, 1995, and some of its reports recommending securities, contained general disclosure that EEI may have a position in and may buy or sell securities it recommends at any time. Such disclosure, however, did not appear in other reports recommending the purchase of securities that EEI through Snow distributed between February 1996 and March 1998, in particular, the reports recommending securities of Naxos and Solv-Ex.
H. By virtue of the conduct described above, EEI willfully violated and Snow caused and willfully aided and abetted violations of Section 206(2) of the Advisers Act. Section 206(2) prohibits an investment adviser from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. The finder's fees that Snow received from Naxos created a conflict of interest that should have been disclosed in EEI's securities recommendations. Moreover, EEI should have disclosed in its securities recommendations that EEI or a related person may own and trade securities recommended by EEI.
I. EEI's Form ADV, filed on May 7, 1992, contained a "no" answer to Part II, Item 13.A., which asks: "Does the applicant or a related person . . . have any arrangements . . . where it . . . is paid cash by or receives some economic benefit . . . from a non-client in connection with giving advice to clients?" This answer became false in 1995 when Snow agreed to be a finder for Naxos for compensation. The false answer remained in EEI's Form ADV until it withdrew its registration in 1998.
J. EEI filed with the Commission an annual report on Form ADV-S on March 13, 1996 ("Form ADV-S").1 In filing its Form ADV-S, EEI represented that its Form ADV remained accurate and that no amendment to its Form ADV was required. During the time that Snow had an undisclosed finder's fee arrangement with Naxos, that representation was false. Snow prepared and signed EEI's Form ADV-S.
K. By virtue of the conduct described in Section II. I., EEI willfully violated Section 204 of the Advisers Act and Rule 204-1 thereunder, and Snow caused and willfully aided and abetted those violations. Section 204 of the Advisers Act and Rule 204-1 require amendment of Forms ADV by investment advisers if the response to certain items becomes inaccurate in a material manner. EEI failed to amend its Form ADV after its response to Item 13.A. of Part II became inaccurate. The fact that Snow had a finder's fee agreement with an issuer, the securities of which EEI recommended, was a material conflict of interest that should have been disclosed.
L. By virtue of the conduct described in Section II. J., Snow and EEI willfully violated Section 207 of the Advisers Act. Section 207 makes it unlawful for any person willfully to make any untrue statement of material fact in any registration application or report filed with the Commission or willfully to omit to state in any such application or report any material fact required to be stated therein. Pursuant to Rule 204-1(d), Form ADV-S was a "report" within the meaning of Section 207.2 EEI and Snow violated Section 207 by filing false Forms ADV-S.
III.
In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Respondents and to impose the sanctions specified therein.
Accordingly, IT IS ORDERED that:
A. Pursuant to Sections 203(e) and 203(f) of the Advisers Act, Respondents be, and they hereby are, censured;
B. Pursuant to Section 203(k) of the Advisers Act, Respondents cease and desist from committing or causing any violation or future violation of Sections 206(2), 204 and 207 of the Advisers Act and Rule 204-1 thereunder;
C. Within thirty (30) days of the entry of this Order, Respondents shall together pay a civil money penalty in the amount of $15,000 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 the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies EEI and Snow as the Respondents in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Donald M. Hoerl, Associate Regional Administrator, Securities and Exchange Commission, Denver Regional Office, 1801 California Street, Suite 4800, Denver, Colorado 80202.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
| 1 | Prior to December 27, 1996, Rule 204-1(c) required that each registered investment adviser file an annual report on Form ADV-S. |
| 1 | Effective December 27, 1996, the Commission stayed paragraph (c) of Rule 204-1 and suspended the use of Form ADV-S pending rule making. See Investment Advisers Act Rel. No. 1602 (Dec. 20, 1996). |