UNITED STATES OF AMERICA
In the Matter of
WAYNE C. STEVENS,
| 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.
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(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Wayne C. Stevens ("Stevens").
In anticipation of the institution of these proceedings, Stevens has 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 him and the subject matter of these proceedings, which Stevens admits, Stevens by his Offer of Settlement consents to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist order set forth below.
Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(f) and 203(k) of the Advisers Act be, and hereby are, instituted.
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 Offer of Settlement submitted by Stevens, the Commission makes the following findings:1
A. THE RESPONDENT
Stevens, 54, of Winnetka, Illinois, was president, chief executive officer, chief investment officer and a director of Duff & Phelps Investment Management Co., Inc. ("Duff") from June 1993 until he left Duff in April 1997 to join others in forming a partnership that currently is registered with the Commission as an investment adviser. During Stevens' tenure at Duff, the firm was registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act.
This proceeding is based on Stevens' involvement in Duff's undisclosed direction of more than $600,000 of advisory client commissions to East West Institutional Services, Inc. ("East West"), a Michigan broker-dealer, in exchange for the referral of a client, a union pension fund (the "Pension Fund"). Duff did not disclose to its clients its direction of brokerage in exchange for a client referral, and it affirmatively and falsely stated in its Commission filings that it did not direct commissions in exchange for client referrals.
In mid-1994, Duff, through a salesperson who was also a vice president of sales and marketing ("Duff salesman"), agreed to direct brokerage trades to East West. In exchange, East West agreed to influence the Pension Fund to award management of a portion of its assets to Duff. East West, through a registered representative that controlled it, was able to influence the Pension Fund because it had a corrupt arrangement with two trustees of the Pension Fund ("the two trustees"), who received kickbacks of commissions from East West.
In June 1995, after Duff had directed approximately $177,000 in commissions from its existing advisory clients for the benefit of East West, East West influenced the Pension Fund to select Duff to manage $120 million of its assets. Duff continued to direct transactions to benefit East West until the spring of 1997. After Duff ceased directing commissions to East West, the Pension Fund terminated its contract with Duff. Duff did not disclose the directed brokerage arrangement with East West to thedisinterested representatives of the Pension Fund or its other clients during the time that it retained management of the Pension Fund assets from June 1995 through July 1997.
Stevens, a senior officer at Duff, was reckless in not knowing about the directed brokerage arrangement in exchange for a client referral.
2. Duff's Direction of Brokerage in Exchange for Management of the Pension Fund
(a) Duff's Agreement with East West
In approximately 1994, East West entered into an arrangement with two trustees of the Pension Fund. Under this arrangement, East West agreed to kick back to the two trustees a portion of the commissions directed to it by the Pension Fund's investment advisers. The advisers would direct the trades to East West through one of its clearing brokers, and East West would forward some of that money to the two trustees.
In mid-1994, the Duff salesman met with a representative from East West. The Duff salesman had learned that East West had the ability to influence selection or retention of money managers for the Pension Fund. East West and the Duff salesman agreed that Duff would direct $600,000 in commissions annually to benefit East West, and, in return, East West would influence the Pension Fund to award management of $120 million of its assets to Duff. East West specifically informed the Duff salesman that the directed brokerage arrangement should be concealed from the disinterested Pension Fund trustees. The two trustees of the Pension Fund required Duff to show its intent to comply with the scheme by directing a certain amount of business to East West before they awarded Duff management of a portion of the Pension Fund's assets.
After meeting with East West, the Duff salesman told others at Duff, including Stevens, that if Duff directed commissions to East West, that firm could arrange for Duff to make a marketing pitch to the Pension Fund. The Duff salesman further explained that Duff's chances of pitching the Pension Fund as a client were closely related to the amount of commissions that Duff sent to East West.
(b) Duff's Policies Regarding Brokerage Allocation
In mid-1994, Duff's policies, as stated in its Form ADV, provided that the firm would not direct brokerage in return for obtaining business referrals. However, Duff, through Stevens and others, allowed its marketing staff, such as the Duff salesman, to influence the direction of brokerage to East West.
(c) Duff Began Directing Brokerage for the Benefit of East West
In mid-1994, Duff began directing commissions to benefit East West. Beginning in late 1994, East West contacted the Duff salesman approximately once a week to demand additional commissions. The Duff salesman, in turn, pressured other Duff employees to direct commissions. Stevens was aware of the Duff salesman's attempts to pressure other Duff employees. Stevens conveyed the Duff salesman's requests to traders to direct commissions to East West. In January 1995, Duff's compliance officer notified Stevens, the Duff salesman and others at Duff that it was against Duff's policy, as stated in its Form ADV filed with the Commission, to direct brokerage in return for client referrals. Stevens, who authorized the direction of brokerage in his capacity as chief investment officer, was reckless in not knowing that Duff's direction of brokerage to East West was part of a quid pro quo to obtain the Pension Fund as a client.
(d) Duff Obtained the Pension Fund Account
In May 1995, approximately ten months after the Duff salesman entered into an arrangement with East West, Duff officers, including Stevens and the Duff salesman, made a presentation to the Pension Fund's investment committee. Prior to the presentation, East West told the two trustees that Duff would continue to direct commissions to East West.
In June 1995, the Pension Fund trustees selected Duff to manage a portion of its assets. Within weeks, the Pension Fund allocated $75 million to the account, and soon thereafter, the Pension Fund increased the amount to $120 million. During the two years that Duff managed the Pension Fund, it paid Duff $985,870.46 in management fees. Prior to obtaining the account, Duff directed approximately $177,000 in commissions for the benefit of East West. Between June 1995 and the spring of 1997, Duff directed approximately $435,000 in brokerage commissions for the benefit of East West, for a total of $613,000 in commissions directed for the benefit of East West for the three-year period from mid-1994 to the spring of 1997.
On February 14, 1996, Stevens, the Duff salesman, Duff's compliance officer, Duff's chairman, and Duff's head of fixed income met to discuss brokerage allocation. The Duff salesman informed the group that Duff would lose the Pension Fund account unless it directed $600,000 in commissions over the next six months to East West. Duff's head of fixed income objected to the practice of directing brokerage in exchange for client referrals. Duff's compliance officer stated that Duff should not set a specific dollar amount of commissions for any broker, and Duff's chairman agreed. Despite the discussion at the meeting, Duff, through Stevens in his capacity as chief investment officer, continued to direct commissions to East West, including approximately $124,000 in commissions from the time of the February 14, 1996 meeting until Duff ceased direction of brokerage to East West in the spring of 1997.
In September 1996, in order to send a message to Duff that it needed to pay more commissions, East West and the two trustees caused the Pension Fund to reduce the amount of itsaccount under Duff's management by $50 million. The reduction of assets was instigated by the two trustees and East West, who wanted to show Duff that it was in danger of losing the account.
In January 1997, Stevens reaffirmed to the disinterested representatives of the Pension Fund the accuracy of Duff's representations, warrants and covenants in its contract with the Pension Fund, which related to, among other things, the accuracy of Duff's Form ADV. Stevens was reckless in not knowing that his January 1997 representations to the disinterested representatives of the Pension Fund were inaccurate, and that Duff's amendments to Forms ADV, discussed in more detail below, contained misrepresentations and omissions with respect to Duff's policy relating to direction of brokerage commission business in return for client referrals. In March 1997, the Duff salesman left Duff to take a position with another investment adviser. In April 1997, Stevens left Duff to join with others in forming an investment management firm. Duff's fraud against the Pension Fund continued at least through the date of Stevens' departure in April 1997 because Duff continued to direct brokerage to East West and receive management fees from the Pension Fund without disclosing to the disinterested representatives of the Pension Fund that it obtained management of the account by directing brokerage for the benefit of East West.
3. Duff's Amendments to Form ADV Filed with the Commission Contained Material False Statements and Omissions
Duff's Form ADV amendments filed with the Commission and distributed to its clients did not disclose that Duff received client referrals in exchange for brokerage commission allocation. Indeed, in some instances, Duff affirmatively represented that it did not engage in such practices. On March 28, 1994, Duff filed an amendment to Form ADV with the Commission, which was signed by Stevens. Duff answered "yes" to Part II, Item 12.A(3), which asks whether the applicant or any related person has authority to determine, without obtaining specific client consent, the broker or dealer to be used. A "yes" answer to this question requires that the applicant describe on Schedule F the factors considered in selecting brokers and determining the reasonableness of their commissions. If the value of products, research and services given to the applicant or a related person is a factor, the applicant must describe, among other things: (1) the products, research and services; and (2) any procedure the applicant used during the last fiscal year to direct client transactions to a particular broker in return for products and research services received. Under Item 12 on Schedule F of Duff's March 1994 Form ADV, Duff stated, among other things:
Under no circumstances do we share in commissions paid by our clients to brokerage firms nor do we receive referrals of potential investment counsel clients from brokerage firms in return for allocating brokerage business to them.
In addition, on its March 1994 amendment to Form ADV, signed by Stevens, Duff answered "yes" to Item 13.A of Part II, which asks whether the applicant or a related person has anyarrangements, oral or in writing, where it is paid cash by or receives some economic benefit (including commissions, equipment or non-research services) from a non-client in connection with giving advice to clients. In its description on Schedule F, Duff described its participation in certain wrap fee programs with brokers, but not any arrangements to receive client referrals in exchange for brokerage. Furthermore, Duff answered "no" to Item 13.B. of Part II of Form ADV, which asks whether the applicant or a related person has any arrangements, oral or in writing, where it directly or indirectly compensates any person for client referrals.
Duff's answers to Items 12 and 13 of Part II of Form ADV remained essentially the same on the amendments to Form ADV signed by Stevens and filed on March 31, 1995 and December 22, 1995, and on the amendments to Form ADV signed by Duff's compliance officer, and filed on January 5, 1996, and March 29, 1996. On December 13, 1996, Duff filed an amendment to Form ADV, also signed by the compliance officer, on which it answered "yes" to Item 13.B., indicating that it had arrangements to directly or indirectly compensate persons for client referrals. However, its description on Schedule F again explained Duff's participation in certain wrap fee programs with brokers, without mentioning any arrangements to receive client referrals in exchange for brokerage, and also contained the same affirmative statement that Duff does not, under any circumstances, receive referrals of potential investment counsel clients from brokerage firms in return for allocating brokerage business. Duff's amendment to Form ADV filed on March 26, 1997, again signed by the compliance officer, was identical to the previous amendment, except that it deleted the statement that Duff did not receive referrals in exchange for allocation of brokerage commissions. Despite the removal of this affirmative representation, Duff nevertheless failed to disclose its referral practices.
C. LEGAL ANALYSIS
Sections 206(1) and 206(2) of the Advisers Act make it unlawful for any investment adviser, directly or indirectly, to employ any device, scheme or artifice to defraud, or to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Scienter is an element of a Section 206(1) violation, but not a Section 206(2) violation. Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979); Oakwood Counselors, Inc. and Paul J. Sherman, Advisers Act Rel. No. 1614 (February 10, 1997), 1997 SEC LEXIS 304 at *12; SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963).
The Supreme Court has interpreted Section 206 to impose a fiduciary duty on investment advisers, requiring an affirmative obligation of utmost good faith, and full and fair disclosure of all material facts to an investment adviser's clients. Capital Gains Research, 375 U.S. at 194. This fiduciary duty requires investment advisers to act for the benefit of their clients, Oakwood,1997 SEC LEXIS 304 at *12 (citing Transamerica Mortgage Advisers, Inc., 444 U.S. 11, 17 (1979)), and precludes them from using their clients' assets to benefit themselves. Kingsley, Jennison, McNulty & Morse, Inc., Initial Decision Rel. No. 24 (November 14, 1991), 1991 SEC LEXIS 2587 at *9.
As a fiduciary, an investment adviser has a duty to disclose to clients "all material information which is intended `to eliminate, or at least expose,' all potential or actual conflicts of interest `whichmight incline an investment adviser consciously or unconsciously - - to render advice which is not disinterested.'" 1986 Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 23170 (April 23, 1986), 1986 SEC LEXIS 1689(quoting Capital Gains Research, 375 U.S. at 191-92); Kingsley, 1991 SEC LEXIS 2587 at *38. A fact is material if there is a substantial likelihood that a reasonable investor would consider it important. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc., et. al. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. Blavin, 557 F. Supp. 1304, 1313-15 (E.D. Mich. 1983), aff'd, 760 F.2d 706 (6th Cir. 1985) (per curiam) (materiality standard applied to Section 206 of the Advisers Act). The standard of materiality is whether a reasonable client or prospective client would have considered the information important in deciding whether to invest with the adviser. See SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992). Information regarding an investment adviser's directed brokerage arrangements is material and must be disclosed to clients. Sheer Asset Management, Inc. and Arthur Sheer, Advisers Act Rel. No. 1459 (January 3, 1995), 1995 SEC LEXIS 10.
Moreover, disclosure of certain arrangements with brokers is specifically required by Form ADV filed with the Commission. Form ADV embodies mandatory disclosure requirements to ensure that material information regarding brokerage placement practices and policies is disclosed to investors. See Investment Adviser Requirement Concerning Disclosure, Recordkeeping, Applications for Registration and Annual Filings, Advisers Act Rel. No. 664 (January 30, 1979), 1979 SEC LEXIS 2235. Any arrangement to direct brokerage in exchange for benefits to the adviser is material and must be disclosed on Form ADV. Sheer Asset, 1995 SEC LEXIS 10.
Because Duff was a fiduciary to its advisory clients, it had a duty to disclose to clients all material information concerning potential or actual conflicts of interest, including information regarding its directed brokerage arrangements, which might have inclined Duff consciously or unconsciously to render advice which was not disinterested. Duff willfully violated Sections 206(1) and 206(2) of the Advisers Act by entering a quid pro quo arrangement, pursuant to which it agreed to direct brokerage for the benefit of East West in exchange for the referral and retention of a client and which was not disclosed to the client. The conduct, knowledge or recklessness of high ranking officers of Duff can be imputed to Duff to establish its violations. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1096 n.16 (2d Cir. 1972).
Section 203(i)(1)(B) of the Advisers Act authorizes the Commission to impose a civil penalty on any adviser or associated person in a proceeding brought pursuant to Section 203(f) who has willfully aided, abetted, counseled, commanded, induced or procured a violation of the Advisers Act.
The elements for aiding and abetting a violation of the federal securities laws include: (1) a primary violation; (2) awareness or knowledge by the aider or abettor that he was participating in an improper activity; and (3) the aider or abettor knowingly and substantially assisted the conduct that constitutes the violation. Investors Research v. SEC, 628 F.2d 168, 178 (D.C. Cir.), cert. denied, 449 U.S. 919 (1980); Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799 (3d Cir.), cert.denied, 439 U.S. 930 (1979)(citing Gould v. American-Hawaiian Steamship Co., 535 F.2d 761, 779 (3d Cir. 1976)).
In order to demonstrate aiding and abetting liability, there must be proof offered to "establish conscious involvement in impropriety . . . ." Monsen, 579 F.2d at 799 (citing Gould, 535 F.2d at 780). This involvement may be demonstrated "by proof that the alleged aider-abettor `had general awareness that his role was part of an overall activity that is improper.'" Monsen, 579 F.2d at 799 (citing SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974)). Recklessness satisfies the scienter element of aiding and abetting when the aider and abettor is a fiduciary. Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990); IIT v. Cornfield, 619 F.2d 909, 922 (2d Cir. 1980).
The substantial assistance element is satisfied where the respondent's actions are a "proximate" or "substantial causal factor" in bringing about the primary violation. See Russo Securities Inc. and Ferdinand Russo, Exchange Act Rel. No. 39181 (October 1, 1997), 1997 SEC LEXIS 2075, *17-18 ("proximate cause"); Rolf, 570 F.2d at 48 ("substantial causal factor"). The Commission need not show that the assistance rendered by the aider and abettor was "the sole cause or the principal cause; it need only be one of the causes." Carole L. Haynes, Initial Decision Rel. No. 78 (November 24, 1995), 1995 SEC LEXIS 3134 at *80.
As discussed above, Duff willfully committed primary violations of Sections 206(1) and 206(2) of the Advisers Act. Stevens willfully aided and abetted and caused Duff's violations because he substantially assisted the conduct that constituted the violation and he was reckless in not knowing that he was participating in an improper activity. In light of the fact that, among other things, the Duff salesman informed Stevens in February 1996 that Duff would lose the Pension Fund account unless it directed $600,000 in brokerage commissions for East West's benefit over the next six months, Stevens was reckless in not knowing of the quid pro quo for a client referral and that such an arrangement would represent a conflict of interest and breach of fiduciary duty to the Pension Fund. Stevens, who was Duff's president, chief executive officer and chief investment officer, substantially assisted Duff's violations because, among other things, he: (1) facilitated the directed brokerage arrangement with East West by instructing his staff to direct brokerage commissions for the benefit of East West; and (2) signed Duff's amendments to Forms ADV in 1995 and signed a letter to the Pension Fund in January 1997, both of which contained material misstatements and omissions.
On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer of Settlement submitted by Stevens.
Accordingly, IT IS ORDERED that:
A. Stevens shall cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act;
B. Stevens shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $20,000 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, Alexandria, VA 22312-0003; and (4) submitted under cover letter that identifies Stevens as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent by certified mail to Juan M. Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108;
C. Stevens shall comply with his undertaking as specified in his Offer of Settlement to perform and implement the following:
1. Within 30 days of entry of this Order, Stevens will cause any investment adviser with which he is affiliated to provide a copy of this Order to all of its clients, together with a cover letter in a form not unacceptable to the Commission's staff.
2. For a period of one year after the entry of this Order, Stevens will cause any investment adviser with which he is affiliated to provide a copy of this Order to all prospective clients not less than 48 hours prior to entering into any written or oral advisory contract (or no later than the time of entering into such contract if the client has the right to terminate the contract without penalty within five business days after entering the contract).
3. Within 60 days after the entry of this Order, Stevens will file an affidavit with the Commission's staff, addressed to the attention of Juan M. Marcelino, District Administrator of the Commission's Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, setting forth the details of his compliance with the undertakings set forth in subparagraph C.1.
4. One year after the entry of this Order, Stevens will file an affidavit with the Commission's staff, addressed to the attention of Juan M. Marcelino, District Administrator of the Commission's Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, setting forth the details of his compliance with the undertakings set forth in subparagraph C.2.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Stevens' Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
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