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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before The
SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940
RELEASE NO. 1822 / September 9, 1999

ADMINISTRATIVE PROCEEDING
File No. 3-10006

In the Matter of

KAREN MICHALSKI and
CHRISTOPHER D. SARGENT,

Respondents.
ORDER INSTITUTING PUBLIC PROCEEDDINGS PURSUANT TO SECTIONS 203(f) ADVISERS ACT OF 1940, MAKING SANCTIONS, AND CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Respondents Karen Michalski ("Michalski") and Christopher D. Sargent ("Sargent").

II.

In anticipation of the institution of these proceedings, Michalski and Sargent have each submitted an Offer of Settlement that 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, except those findings pertaining to the jurisdiction of the Commission over them and the subject matter of these proceedings, which they admit, Michalski and Sargent, by their Offers of Settlement, consent to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist order set forth herein.

Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(f) and 203(k) of the Advisers Act be, and hereby are, instituted.

III.

On the basis of this Order Instituting Proceedings Pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions, and Cease-and-Desist Order ("Order") and the Offers of Settlement submitted by Michalski and Sargent, the Commission makes the following findings:1

A. Respondents

1. Michalski, a resident of Quincy, Massachusetts, was at all relevant times employed as a fixed-income trader by Shawmut Investment Advisers, Inc. ("Shawmut Advisers"), an investment adviser registered with the Commission until December 1995 (File No. 801-20738), with its principal place of business in Boston, Massachusetts.

2. Sargent, a resident of Boston, Massachusetts, was at all relevant times employed as a fixed-income trader by Shawmut Advisers.

B. Facts

This proceeding arises from Shawmut Advisers' undisclosed use of approximately $1.9 million of advisory client commissions and mark-ups and mark-downs ("commissions" unless otherwise noted) to compensate broker-dealers ("brokers") for client referrals. From mid-1993 to December 1995, Shawmut Advisers represented to its clients that it directed brokerage commissions to brokers on the basis of research they provided.2 However, certain brokers were selected by a Shawmut Advisers salesman ("Salesman") on the basis of their ability to refer clients to Shawmut Advisers. Shawmut Advisers did not disclose to its clients, in its Form ADV or otherwise, that it directed commissions to brokers in exchange for client referrals. In addition, Michalski and Sargent altered several trade tickets in order to conceal that they did not seek the best price on certain transactions directed to a broker selected by the Salesman. Accordingly, on these transactions, Shawmut Advisers failed to seek the best execution for its clients.

In late 1994, the Salesman entered into a client referral arrangement with a registered representative of a Michigan broker ("Michigan Broker"). The Salesman and the registered representative agreed that for every one million dollars of pension plan assets that the registered representative assisted the Salesman in securing for Shawmut Advisers, the Salesman would cause $1,000 of brokerage commissions to be directed to the Michigan Broker. However, because the Michigan Broker had no facilities for executing or clearing securities transactions, Shawmut Advisers directed all trades to specific clearing brokers for the benefit of the Michigan Broker.

With the assistance of the registered representative, in May 1995, Shawmut Advisers was selected by a pension plan ("Pension Plan") to liquidate the Pension Plan's $600 million fixed-income portfolio and reinvest the proceeds. In order to ensure that the Michigan Broker would receive a specified amount of commissions as compensation for the registered representative's assistance in obtaining the Pension Plan account, the Salesman falsely told the head of Shawmut Advisers' fixed-income department that the Pension Plan had instructed Shawmut Advisers to direct trades in the account to specific brokers for the benefit of the Michigan Broker. Subsequently, the Michigan Broker informed the traders that it had entered into a correspondent agreement with a fixed-income broker-dealer ("Fixed-Income Broker-Dealer"). Pursuant to that agreement, the Fixed-Income Broker-Dealer forwarded to the Michigan Broker 80% of the mark-ups or mark-downs on securities transactions in the Michigan Broker's customers' accounts.

Shawmut Advisers' procedures for the selection of broker-dealers to execute fixed-income securities transactions involved obtaining bids or offers from three or more broker-dealers for each transaction, and awarding the transaction to the broker-dealer with the best price. Michalski and Sargent were responsible for directing trades in accordance with Shawmut Advisers' procedures.

After receiving the Salesman's instructions to direct transactions to the Michigan Broker, the head of Shawmut Advisers' fixed-income department told Michalski and Sargent to give the Fixed-Income Broker-Dealer an opportunity to bid or offer on all trades.3 He told Michalski and Sargent to give the Fixed-Income Broker-Dealer a "last look" on all trades, meaning to give the Fixed-Income Broker-Dealer an opportunity to beat the best price. He also told Michalski and Sargent to "credit" the Michigan Broker on all trades which they awarded to the Fixed-Income Broker-Dealer.

In an effort to ensure that the Michigan Broker received transactions, Michalski and Sargent awarded trades to the Fixed-Income Broker-Dealer when it did not submit the best price. Under Shawmut Advisers' procedures, the fixed-income traders were required to record all bids or offers for each transaction on a trade ticket, and fax the trade ticket to the client. In order to conceal from Shawmut Advisers' clients that they did not seek the best available price, the traders altered trade tickets by either covering with white-out or crossing out more favorable bids or offers to make it appear that the Fixed Income-Broker-Dealer had submitted the best price, when it had not. Accordingly, on those transactions, Shawmut Advisers failed to seek the best price for its clients' securities transactions, which cost its clients $63,359.

C. Violations

Sections 206(1) and (2) of the Advisers Act prohibit an investment adviser from employing any device, scheme, or artifice to defraud clients or from engaging in any transaction, practice or course of business that operates as a fraud on clients. Sections 206(1) and (2) establish a fiduciary duty for investment advisers to act for the benefit of their clients. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). An investment adviser's fiduciary duty includes the requirement to seek the best execution for client securities transactions where the adviser is in a position to direct brokerage transactions. Kidder Peabody & Co., Inc., Advisers Act Rel. No. 232, 43 S.E.C. 911 (Oct. 16, 1968); Delaware Management Company, Inc., Exchange Act Rel. No. 8128, 43 S.E.C. 392 (July 19, 1967). Michalski and Sargent willfully aided and abetted and caused violations of Sections 206(1) and (2) of the Advisers Act by failing to seek the best execution on certain transactions for Shawmut Advisers' clients.

Section 204 of the Advisers Act and Rule 204-2(a)(3) thereunder require an investment adviser to make and keep true and accurate memoranda of each order given by the investment adviser for the purchase or sale of a security. Michalski and Sargent willfully aided and abetted and caused Shawmut Advisers' violations of Section 204 of the Advisers Act and Rule 204-2(a)(3) by altering Shawmut Advisers' trade tickets on certain fixed-income trades in order to conceal from Shawmut Advisers' clients that they did not seek the best available price. As a result, Shawmut Advisers failed to keep true and accurate memoranda of each order.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers of Settlement submitted by Michalski and Sargent and to impose the sanctions specified therein.

Accordingly, IT IS HEREBY ORDERED that:

A. Michalski cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1) and 206(2) of the Advisers Act and Rule 204-2(a)(3) thereunder;

B. Michalski shall, within sixty days of the entry of this Order, pay a civil money penalty in the amount of $5,000 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 Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies Michalski as the 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 James B. Adelman, Associate District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, Massachusetts 02108;

C. Michalski be, and hereby is, barred from association with any investment adviser, with the right to reapply for association after fifteen (15) months to the appropriate self-regulatory organization, or if there is none, to the Commission;

D. Sargent cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1) and 206(2) of the Advisers Act and Rule 204-2(a)(3) thereunder;

E. Sargent shall, within sixty days of the entry of this Order, pay a civil money penalty in the amount of $5,000 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 Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies Sargent as the 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 James B. Adelman, Associate District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, Massachusetts, 02108; and

F. Sargent be, and hereby is, barred from association with any investment adviser, with the right to reapply for association after fifteen (15) months to the appropriate self-regulatory organization, or if there is none, to the Commission.

By the Commission.

Jonathan G. Katz
Secretary


Footnotes

1 The findings, contained in Section III of this Order, are made pursuant to Michalski's and Sargent's Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 "Soft dollar practices" generally describe arrangements whereby an investment adviser uses commission dollars generated by its advisory clients' securities trades to pay for research, brokerage, or other products, services or expenses. S Squared Technology Corp., Advisers Act Rel. No. 1575, 62 SEC Docket 1560, 1561 (Aug. 7, 1996).
3 Michalski and Sargent did not have knowledge of Shawmut Advisers' undisclosed use of its advisory client commissions to compensate certain broker-dealers for client referrals.

http://www.sec.gov/litigation/admin/IA-1822.htm


Modified:09/09/1999