UNITED STATES OF AMERICA
In the Matter of
|ORDER INSTITUTING PUBLIC
MAKING FINDINGS AND IMPOSING
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that proceedings be, and hereby are, instituted pursuant to Section 203(e) of the Investment Advisers Act of 1940 ("Advisers Act") against Oechsle International Advisors, L.L.C. ("Oechsle").1
In anticipation of the institution of these administrative proceedings, Oechsle has submitted an Offer of Settlement that the Commission has determined to accept.2 Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and prior to a hearing and without admitting or denying the findings set forth herein, Oechsle consents to the entry of this Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions. The Commission has determined that it is appropriate and in the public interest to accept the Offer of Settlement from Oechsle, and accordingly is issuing this Order.
Based on the foregoing, the Commission finds that:3
Oechsle is a registered investment adviser headquartered in Boston with approximately $11.8 billion under management as of December 31, 1998. Oechsle services institutional investors and high net worth individuals through a series of separate client accounts and commingled investment vehicles.
B. Other Parties
ABN AMRO Incorporated ("AAI"), headquartered in Chicago with offices in New York, is a registered broker-dealer pursuant to Section 15 of the Exchange Act and maintains an international equities sales trading operation in its New York location.
Andrew S. Parlin, age 39, lives in Massachusetts. During the relevant time, Parlin had primary responsibility for managing a number of client accounts including those managed pursuant to Oechsle's Select management approach. He also was one of seven managing principals and served on Oechsle's five-member executive committee.
Angelo Iannone, age 38, lives in Old Westbury, New York. During the relevant period, Iannone was head of AAI's international equities sales trading desk in New York, and had a long-standing client relationship with Oechsle and Parlin, pre-dating his employment with AAI. In addition, Iannone was responsible for hiring and supervising other sales traders on AAI's international equities sales trading desk.
On several occasions during 1998, Andrew Parlin, then a principal and portfolio manager at Oechsle, and Angelo Iannone, then the head of international equities sales trading at AAI, placed purchase orders in at least five securities heavily owned by Parlin's advisory clients shortly before the close of the market for the purpose of increasing the closing price of those securities, a practice known as "marking the close." At the time of the trading, the client accounts under Parlin's management maintained substantial portfolio positions in the involved securities. By intentionally paying a higher price to buy securities at the end of the day and the end of the reporting period, Parlin sought to cause, and, in some cases caused a short-term increase in the overall value of certain securities held in the accounts under his management. In certain instances the increases in closing price coincided with fiscal period ends. Oechsle had insufficient systems to implement the policies and procedures in place to detect and prevent Parlin's violations.
D. Oechsle's "Select" Portfolio Management Approach
In 1994, Oechsle first offered its clients the opportunity to participate in an investment management approach known as "Select." Client accounts managed under the Select approach were primarily invested in equity securities of non-U.S. companies. The Select accounts' assets were typically concentrated in 30 to 40 stocks with the top 10 holdings comprising 50 percent of the portfolios. The Select approach was marketed to institutional clients. As of December 31, 1998, there was $720 million in client accounts managed according to the Select approach, comprising approximately 6% of Oechsle's total assets under management. While each client account had its own performance objectives, the typical benchmark for the Select investment approach was to earn a cumulative investment return that exceeded the return of the Morgan Stanley Capital International EAFE Index. During the relevant time period, Parlin managed a number of client accounts according to the Select approach. Parlin was the lead portfolio manager for Select accounts until he was placed on administrative leave.
E. Trading in Question
Telephone conversations from AAI's telephone lines at AAI's international equities trading desk in New York contain explicit discussions - between Parlin and Iannone and between Iannone and others - about increasing the prices of foreign equity securities at or near market close. Many of these conversations and related trades occurred on or near the last trading days of Oechsle's fiscal quarters ended June 30 and September 30, 1998. The conversations identify five securities in which Parlin and Iannone discussed moving the price of the security by marking the close. Those securities include: (1) British Biotech plc, a U.K. pharmaceutical concern; (2) Volkswagen A.G., the German automaker; (3) Banca di Roma SpA, the Italian financial services firm; (4) the American Depository Receipts ("ADRs") of Pohang Iron and Steel, a Korean steel manufacturer; and (5) Renault, a French automaker. Except for Pohang ADRs, these securities traded on various foreign exchanges. As mentioned above, these securities were among the largest positions in the Select clients' accounts under Parlin's management.
Over a three-day period, Iannone and Parlin had numerous conversations regarding how to implement Parlin's instruction of September 28, 1998 to close the price of British Biotech plc higher by the end of the quarter, with 40 pence being the desired target. On September 29, 1998, Iannone asks Oechsle's head trader ". . . what the price target is of BBG." Later, Iannone is reminded by Oechsle's trader that "the main objective is the end of the month. . . ." In addition, Parlin reminded Iannone "my strategy on BBG, it's a two day, it's a two day 40 strategy." To which Iannone responded ". . . the longer we wait, the better we're gonna be." Finally, on September 30, 1998, Iannone informed Parlin "I bought a hundred early on just so someone wouldn't open it down low." Later in the morning, Iannone and Parlin discussed how many shares it would take to get BBG to 40. During the three-day period, many of these conversations included detailed discussions concerning how much capital from the Select clients' accounts and how many shares would be necessary to fulfill this strategy.
Regarding Pohang Iron and Steel, Iannone and Parlin's intent to move the price is revealed in a discussion where Parlin asked Iannone "should I nudge it a bit?" To which, Iannone answered, "At this point in time, you've got so much stock under your belt. . . . When the wind's at your back, we're going to make it . . . storm." Two days prior to attempting, albeit unsuccessfully, to move the price of Pohang, Iannone and Parlin began to discuss their plan for moving the stock at the end of the quarter. As for Renault, Parlin asked Iannone what it would take to make Renault look more constructive at the closing because he wanted to build a platform the day before the end of the quarter. Iannone responded that it would be easy because "we can move the queue so easy, we'll just have to wait till close to the close." The following day, Parlin and Iannone confirmed that they would purchase an additional 80,000 shares of Renault at the close. Thereafter, due to heavy selling of Renault stock, Parlin and Iannone made no purchases at the close. Regarding Volkswagen A.G., Parlin informed Iannone that he was a buyer of 67,000 shares and that he wanted to make the stock "scream." Iannone responded "we're going to do it on the close," Volkswagen's price did not in fact increase. As for Banca di Roma SpA, on June 30, 1998, Parlin told Iannone "it's hard to do uh, this window dressing when markets suck." Similarly, on September 30, 1998, just three minutes prior to the close of the Italian Exchange, Iannone asked Parlin where he would like to close Banca di Roma, and Parlin responded "if you could close that up five percent, I'd love it." Despite Parlin's purchases, Banca di Roma's stock price fell.
F. Oechsle's Systems Did Not Detect the Improper Trading by Parlin
While Oechsle had in effect during the violative period written policies and procedures regarding trade processing, portfolio compliance, and other issues, it failed to adequately implement its policies that prohibited manipulative trading. In particular, while Oechsle reviewed Parlin's trading activity on a daily basis, his trading methods were not effectively reviewed for compliance with this aspect of the firm's policies. It is essential that advisers implement policies reasonably designed, under the circumstances of the particular investment strategies employed by the firms, to detect and prevent violations of the federal securities laws by even their most experienced employees.
G. Oechsle's Discovery of Parlin's Conduct and Subsequent Actions
Upon receiving an inquiry from a foreign exchange, Oechsle undertook an internal investigation of Parlin's trading that resulted in Parlin being placed on administrative leave and eventually resigning from Oechsle. As a result of that investigation, and before the entry of this Order, Oechsle voluntarily paid its clients approximately $6 million to recompense clients for any possible adverse effect of Parlin's trading. In addition, Oechsle has implemented a series of reforms, including the enhancement of its segregation of functions and the requirement that all equity trades be initiated and monitored by the trading department and not by portfolio managers. Oechsle also has hired additional compliance personnel, reorganized and hired additional personnel in its trading department, upgraded its trading system, and strengthened its compliance program in this respect.
Section 203(c)(6) of the Advisers Act authorizes the Commission to institute proceedings to determine whether it is in the public interest to sanction an investment adviser if it has failed reasonably to supervise another person, subject to its control, who commits a violation. In this case, by engaging in trading, described above, intended to increase the closing prices of portfolio securities, Parlin violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aided and abetted violations of Sections 206(1) and (2) of the Advisers Act. The Commission has repeatedly emphasized that the duty to supervise is a critical component of the federal regulatory scheme. Vilis Pasts and BTS/Bond Timing, Inc., Advisers Act Rel. No. 1663, 65 SEC Docket 1106, 1114 (September 15, 1997). The Commission has recognized that the "delicate fiduciary relationship" between an investment adviser and a client imposes an obligation on an adviser to review and monitor its activities and the activities of its employees. Shearson Lehman Brothers, Inc. and Stein Roe & Farnham, Exchange Act Rel. No. 23640, 36 SEC Docket 1075 (September 24, 1996). Accordingly, an investment adviser that does not reasonably supervise its associated persons with a view towards preventing violations of federal securities laws may be subject to sanction by the Commission. See Nicholas-Applegate Capital Management, Advisers Act Rel. No. 1741, 67 SEC Docket 2312 (August 12, 1998). Although an investment adviser that has established procedures designed to detect and prevent wrongdoing by supervisees may, under Section 203(c)(6)(A) and 203(e)(6)(B), assert those procedures as a defense to a Commission action for failure to supervise, that defense is not available to Oechsle because its implementation of its procedures was inadequate.
Here, Oechsle failed to effectively implement its general policy that prohibited trading such as that engaged in by Parlin. Oechsle's periodic review of Parlin's trading methodology to ensure compliance with the firm's own procedures and to ensure adherence to the securities laws was not effective.
By reason of the foregoing, the Commission finds that Oechsle International Advisors, LLC failed reasonably to supervise Andrew Parlin with a view to preventing his violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and his aiding and abetting violations of Sections 206(1) and (2) of the Advisers Act.
Accordingly, IT IS HEREBY ORDERED that Oechsle International Advisors, LLC
A. Be, and hereby is, censured; and
B. Pay a civil money penalty of $200,000, within ten business days of the entry of the Order, by wire transfer in accordance with instructions furnished by the Commission staff, or by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Gregory S. Bruch, Assistant Director, Securities and Exchange Commission, 450 Fifth St., N.W., Washington, DC 20549-0703.
By the Commission.
Jonathan G. Katz
|1||The Commission simultaneously filed settled proceedings against the broker-dealer, former portfolio manager, and the trader, respectively, referred to below, In the Matter of ABN AMRO Incorporated (Admin. Proc. No. 3-10552); In the Matter of Andrew Parlin (Admin. Proc. No. 3-10555); and In the Matter of Angelo Iannone (Admin. Proc. No. 3-10553).|
|2||In determining to accept the Offer of Settlement, the Commission considered the remedial acts undertaken by Oechsle and the cooperation afforded the Commission staff.|
|3||The findings herein are made pursuant to Oechsle's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|Home | Previous Page||