Clarke T. Blizzard and Rudolph Abel Carol Fox Foelak, Administrative Law Judge
INVESTMENT ADVISERS ACT OF 1940
Release No. 1865 / April 13, 2000
SECURITIES EXCHANGE ACT OF 1934
Release No. 42681 / April 13, 2000
Administrative Proceeding
File No. 3-10007
| In the Matter of
MICHAEL J. ROTHMEIER, Respondents.
|
ORDER MAKING FINDINGS |
I.
On September 9, 1999, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Craig Janutol ("Janutol") and others.1
II.
Respondent Janutol has submitted an Offer of Settlement to the Commission, 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 prior to a hearing pursuant to the Commission´s of Practice, 17 C.F.R. '201.100 et seq., and without admitting or denying the findings contained in this order, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which he admits, Respondent Janutol consents to the entry of the findings and the imposition of the remedial sanctions set forth below.
III.
On the basis of the Order Instituting Public Administrative Proceedings and Cease-And-Desist Proceedings ("Order") and the Offer of Settlement submitted by Respondent Janutol, the Commission finds that:2
Settling Respondent
A. Janutol, 43, of Grosse Pointe, Michigan, was the owner of East West Institutional Services, Inc. ("East West") from July 1992 to December 1996, and president of East West from July 1992 until April 1997. From November 1988 through December 1997, Respondent Janutol was also a registered representative and principal of East West Capital Corp., another broker-dealer registered with the Commission. He was unemployed from December 1997 through February 1999. From February 1999 through May 1999, he was employed at Apex Capital, L.L.C., a registered broker-dealer.
Relevant Entities
B. East West is a broker-dealer registered with the Commission since 1982 (File No. 8-28286). During the period giving rise to these proceedings, its principal place of business was in Harper Woods, Michigan.
C. Shawmut Investment Advisers, Inc. ("Shawmut Advisers") was registered with the Commission as an investment adviser (File No. 801-20738) from February 16, 1984 until December 31, 1995, when it withdrew its registration as an investment adviser. Its principal place of business was Boston, Massachusetts.
D. Fleet Investment Advisors Inc. ("Fleet Advisors") is an investment adviser registered with the Commission (File No. 801-20312) since December 30, 1983. As of December 1, 1995, Fleet Advisors became the successor-in-interest of Shawmut Advisers. Its principal place of business is Boston, Massachusetts. As a result of the matters giving rise to and relating to this Order, on September 9, 1999, Fleet Advisors, as successor to Shawmut Advisers, was ordered to cease and desist from committing or causing any violations and any future violations of Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rules 204-1(b)(1) and 204-2(a)(3) thereunder, and Section 17(e)(1) of the Investment Company Act of 1940, and to comply with certain undertakings. Fleet Investment Advisors Inc., Advisers Act Release No. 1821, 1999 SEC LEXIS 1805 (September 9, 1999).
FACTS
Summary
E. Janutol, as owner and president of East West, failed reasonably to supervise a registered representative of East West with a view to preventing his violations of the federal securities laws. The registered representative entered into an arrangement with a Shawmut Advisers´ salesman, which they agreed to conceal from Shawmut Advisers´ clients, whereby the registered representative referred clients to the salesman in exchange for commissions directed to the registered representative and East West from Shawmut Advisers´ clients´ transactions. As a result, the registered representative aided and abetted and caused Shawmut Advisers´ failure to disclose to its clients that it used brokerage commissions generated from its clients´ transactions to compensate brokers for client referrals, in violation of Sections 206(1) and (2) of the Advisers Act.
The Underlying Violations
F. In late 1994, a Shawmut Advisers´ salesman ("the Salesman") entered into an undisclosed client referral arrangement with East West and its only registered representative, who was also the de facto president and owner of East West ("the Registered Representative"). Under the arrangement, the Salesman caused Shawmut Advisers to direct commissions from its clients´ transactions to the Registered Representative and East West in exchange for client referrals from them.
G. The Registered Representative and the Salesman agreed that for every one million dollars of pension plan assets that the Registered Representative assisted the Salesman to secure for Shawmut Advisers, the Salesman would cause $1,000 of brokerage commissions to be directed to East West.
H. Additionally and because East West neither executed nor cleared securities transactions, the Salesman instructed Shawmut Advisers to direct trades to specific brokers who had correspondent or clearing agreements with East West. Pursuant to their agreements with East West, those correspondent and clearing broker-dealers forwarded to East West approximately 70% - 80% of the commissions on transactions directed to them by Shawmut Advisers.
I. The Registered Representative and the Salesman agreed to conceal their client referral arrangement from Shawmut Advisers´ clients.
J. Pursuant to their arrangement, the Registered Representative assisted the Salesman to obtain accounts from the International Brotherhood of Teamsters Local Union 710 pension fund ("Local 710"). In May 1995, Local 710 selected Shawmut Advisers to liquidate an approximately $600 million fixed-income portfolio. In June 1995, Local 710 also selected Shawmut Advisers as an equity manager.
K. Pursuant to their arrangement, the Salesman caused Shawmut Advisers to direct the liquidation of the $600 million fixed-income portfolio to East West, in addition to directing Local 710 generated brokerage commissions for equity transactions to East West.
L. The Registered Representative aided and abetted and caused Shawmut Advisers´ failure to disclose to its clients that it used brokerage commissions generated from its clients´ transactions to compensate brokers for client referrals, in violation of Sections 206(1) and (2) of the Advisers Act.
Janutol Failed Reasonably to Supervise the Registered Representative
M. On March 31, 1994, Janutol agreed to sell East West to the Registered Representative. Because the Registered Representative did not possess the securities license required to be the principal of an NASD registered broker, Janutol agreed to remain listed with the NASD as the owner and president of East West until the Registered Representative obtained such a license. During the period at issue, Janutol knew that the Registered Representative had been fired by another broker-dealer in 1991 for unauthorized trading, that he had lost his securities license, and that he had been unable to obtain employment with any broker since that time.
N. On September 2, 1994, the Registered Representative´s securities license was reinstated, and Janutol employed the Registered Representative as East West´s only Registered Representative. Additionally, Janutol agreed to pay the Registered Representative 95% of East West´s brokerage commissions.
O. Also in September 1994, Janutol sent a letter to the securities department of the state of Michigan stating that he would directly supervise the Registered Representative. However, after September 2, 1994, Janutol relinquished day-to-day control of East West and limited his activities at East West to recordkeeping functions.
P. Between September 1994 and the end of 1995, Janutol had only two formal supervisory meetings with the Registered Representative. During the two supervisory meetings, Janutol failed to review any files or accounts with the Registered Representative, relying instead on the Registered Representative´s representations that his business with investment advisers was "clean business," and that there were no problems.
Q. Janutol knew that East West did not execute or clear securities transactions and produced no research. Janutol reviewed the Registered Representative´s commission runs, and knew that soon after he was hired, the Registered Representative began to generate hundreds of thousands of dollars in brokerage commissions. Nonetheless, Janutol failed to inquire into the basis for large volumes of brokerage commissions directed by investment advisers to the Registered Representative.
R. In August 1995, the Salesman arranged for another broker-dealer to split commissions with East West. Pursuant to the arrangement, the broker-dealer executed transactions in Shawmut Advisers´ clients´ accounts, and forwarded 80% of the commissions on those transactions to East West.
S. Janutol had knowledge of the commission-splitting arrangement with the broker-dealer from its inception in August 1995, and that the arrangement differed from the fully-disclosed correspondent and clearing arrangements that East West had with other broker-dealers. However, Janutol did not inquire of either the Registered Representative or the broker-dealer regarding the commission-splitting arrangement.
T. Janutol remained the record owner and principal of East West until December 1996, when the Registered Representative became the record owner. Janutol remained president of East West with supervisory responsibilities for the Registered Representative until April 1997. Thus, Janutol was responsible for supervising the Registered Representative during the period at issue.
Violations
U. As a result of Janutol´s failure reasonably to discharge the duties and obligations incumbent upon him as the Registered Representative´s supervisor, including failing to respond reasonably to unusual circumstances and indications of wrongdoing by the Registered Representative, Janutol failed reasonably to supervise the Registered Representative with a view to preventing the Registered Representative´s aiding and abetting and causing Shawmut Advisers´ violations of Sections 206(1) and (2) of the Advisers Act.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Janutol´s Offer of Settlement.
Accordingly, IT IS HEREBY ORDERED that:
A. pursuant to Section 15(b)(6)(A) of the Exchange Act, Janutol be, and hereby is, suspended from association with any broker or dealer for a period of six months, effective on the second Monday following the entry of this Order;
B. pursuant to Section 15(b)(6)(A) of the Exchange Act, Janutol be, and hereby is, suspended from association in a supervisory and propriety capacity with any broker or dealer for a period of twelve months immediately following the period of his suspension from association with any broker or dealer;
C. pursuant to Section 21B of the Exchange Act, Janutol shall pay a civil penalty in the amount of $5,000 to the United States Treasury within sixty days of the date of the entry of the Order. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier´s check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter which identifies Janutol as the Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont St., Suite 600, Boston, Massachusetts 02108;
D. Janutol shall comply with his undertaking to provide, within thirty days after the expiration of the suspensions described in paragraphs IV.A. and IV.B., above, an affidavit via certified mail to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont St., Suite 600, Boston, Massachusetts 02108, setting forth with particularity the details of his compliance with the suspensions. Janutol shall not act in a supervisory or propriety capacity until he delivers such affidavit.
By the Commission.
Jonathan G. Katz
Secretary
FOOTNOTES
| 1 | An Order Instituting Public Administrative Proceedings and Cease-And-Desist Proceedings against Janutol and others was issued by the Commission on September 9, 1999. |
| 2 | The findings herein are made pursuant to Respondent Janutol´s Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. |