INVESTMENT ADVISERS ACT OF 1940
Release No. 2053 / September 3, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10882


In the Matter of

VANDERBILT CAPITAL ADVISORS LLC,

Respondent.


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ORDER INSTITUTING PUBLIC
ADMINISTRATIVE PROCEEDINGS
PURSUANT TO SECTION
203(e) OF THE INVESTMENT
ADVISERS ACT OF 1940,
MAKING FINDINGS AND
IMPOSING REMEDIAL SANCTIONS
AND MONETARY PENALTIES

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 203(e) of the Investment Advisers Act of 1940 ("Advisers Act") against Vanderbilt Capital Advisors LLC.

In anticipation of the institution of these proceedings, Vanderbilt Capital Advisors has submitted an Offer of Settlement ("Offer"), which Offer the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, Vanderbilt Capital Advisors admits the jurisdiction of the Commission over it and the subject matter of these administrative proceedings and consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 203(e) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions and Monetary Penalties ("Order"), without admitting or denying the Commission's findings, except as for those contained in paragraph III.A below, which are admitted.

II.

Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 203(e) of the Advisers Act be, and hereby are, instituted.

III.

On the basis of this Order and the Offer submitted by Vanderbilt Capital Advisors, the Commission makes the following findings:1

RESPONDENT

A. Vanderbilt Capital Advisors has been a registered investment adviser since 1995. Vanderbilt Capital Advisors manages approximately $4.5 billion in fixed-income accounts. At the time of the events discussed in this Order, Vanderbilt was known as ARM Capital Advisors LLC.

ADJUSTED TRADING VIOLATIONS BY SENIOR PORTFOLIO MANAGER

B. In March and April 1998, a senior portfolio manager of ARM Capital Advisors and a registered representative associated with a registered broker-dealer planned and transacted certain adjusted trades in investment-grade corporate bonds between ARM Capital Advisors and the registered representative's broker-dealer. Adjusted trading is a fraudulent trading practice whereby a person sells a security at a price above the prevailing market price and purchases another security at a corresponding price above the prevailing market price to offset the overpayment in the first transaction.

C. On March 30 and 31, 1998, the senior portfolio manager caused certain accounts managed by ARM Capital Advisors to sell $100 million of investment-grade corporate bonds to the registered representative's broker-dealer at prices negotiated by the senior portfolio manager and the registered representative. These prices were above prevailing market prices for the bonds. Accordingly, these accounts benefited. The senior portfolio manager and the registered representative knew that these prices were above prevailing market prices.

D. On April 2 and 3, 1998, the senior portfolio manager caused different accounts managed by ARM Capital Advisors to repurchase the same bonds from the broker-dealer at prices negotiated by the senior portfolio manager and the registered representative. These prices were lower than the prices at which ARM Capital Advisors had sold the bonds to the broker-dealer.

E. As a result, the broker-dealer suffered losses to the extent that it purchased the bonds from certain accounts managed by ARM Capital Advisors at prices above the prevailing market prices and sold the same bonds back to different accounts managed by ARM Capital Advisors at lower prices.

F. To offset the broker-dealer's losses, on March 31, April 3, and April 6, 1998, the senior portfolio manager caused ARM Capital Advisors to purchase $100 million of different investment-grade corporate bonds from the broker-dealer at prices negotiated by the senior portfolio manager and the registered representative. These prices were above the prevailing market prices; the senior portfolio manager and the registered representative were aware of this. These transactions were consistent with the senior portfolio manager and registered representative's earlier discussions as to how ARM Capital Advisors would reimburse the broker-dealer. The senior portfolio manager purchased these bonds in the same accounts in which he had repurchased the initial bonds on April 2 and 3.

G. Thus, the senior portfolio manager caused certain accounts managed by ARM Capital Advisors to suffer unrealized losses to pay for the gains he procured for different accounts managed by ARM Capital Advisors by trading bonds above the prevailing market prices.

ARM CAPITAL ADVISORS'S FAILURE TO SUPERVISE

ITS SENIOR PORTFOLIO MANAGER

H. ARM Capital Advisors had procedures that required compliance personnel to review trades to ensure that its senior portfolio manager purchased securities that were consistent with its clients' investment objectives and account characteristics. Here, the compliance personnel complied with those procedures. ARM Capital Advisors, however, did not have procedures that required compliance personnel to review before settlement the prices at which the senior portfolio manager transacted trades. As a result, the senior portfolio manager was able to transact the trades described above at prices above the prevailing market prices.

I. Subsequent to the trades described above, Vanderbilt Capital Advisors adopted procedures that require: (i) all proposed trades by all portfolio managers to be approved by supervisory personnel; (ii) all portfolio managers to obtain competing price quotes for all proposed trades; (iii) supervisory personnel to sample and compare competing price quotes to the prices or reported trades available from other sources; (iv) supervisory personnel to review and evaluate trades after settlement, including the quality of execution and the amount and the distribution of broker commissions; and (v) supervisory personnel to establish and monitor an approved broker-dealer list and to monitor all broker-dealer commission activity.

VIOLATIONS

J. Section 17(a) of the Securities Act makes it unlawful for any person in the offer or sale of any securities to: employ any device, scheme, or artifice to defraud; obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Adjusted trading is a violation of Section 17(a) of the Securities Act. Hanauer, Stern & Co., Securities Exchange Act Rel. No. 21313, 1984 SEC LEXIS 759 (Sept. 11, 1984); TransAmerican Securities, Inc., Securities Exchange Act Rel. No. 17063, 1980 SEC LEXIS 2353 (June 9, 1980).

K. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person in connection with the purchase or sale of any security to: employ any device, scheme or artifice to defraud; make any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. Adjusted trading is a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Id.

L. Section 203(e) of the Advisers Act authorizes the Commission to sanction any investment adviser that has failed reasonably to supervise, with a view to preventing violations of the federal securities laws, another person who commits such a violation, if such other person is subject to his supervision. Section 203(e) provides a defense if the investment adviser has established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect violations.

M. The senior portfolio manager willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by transacting the adjusted trades described above.

N. ARM Capital Advisors did not have procedures that would reasonably be expected to prevent and detect violations of the type in which the senior portfolio manager engaged. In particular, ARM Capital Advisors did not have procedures that provided for review of the prices at which a senior portfolio manager's trades were transacted. Consequently, senior portfolio managers had unsupervised control over the prices at which trading between broker-dealers and client accounts occurred. In an analogous situation, the Commission has found that an investment adviser failed reasonably to supervise where it gave a senior portfolio manager "too much control over the pricing process with little or no oversight by anyone in a supervisory capacity." Van Kampen American Capital Asset Management, Advisers Act Rel. No. 1525, 60 SEC Docket 1284, 1289 (September 29, 1995).

O. ARM Capital Advisors failed reasonably to supervise the senior portfolio manager with a view to preventing his violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

IV.

In view of the foregoing, the Commission deems it appropriate to accept Vanderbilt Capital Advisors's Offer of Settlement and to impose the sanctions specified therein.

Accordingly, IT IS HEREBY ORDERED, pursuant to Sections 203(e) and 203(i) of the Advisers Act, that Vanderbilt Capital Advisors:

A. be, and hereby is, censured;

B. pay a civil money penalty totaling $125,000.00 to the United States Treasury within 10 days of the entry of this Order. 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 that identifies Vanderbilt Capital Advisors LLC 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 to Richard P. Murphy, Assistant District Administrator, Securities and Exchange Commission, Atlanta District Office, 3475 Lenox Road, N.E., Suite 1000, Atlanta, GA 30326-1232;

C. comply with its undertaking to:

1. maintain its existing procedures, including but not limited to procedures that require: (a) all proposed trades by all portfolio managers to be approved by supervisory personnel; (b) all portfolio managers to obtain competing price quotes for all proposed trades; (c) supervisory personnel to sample and compare competing price quotes to the prices of reported trades available from other sources; (d) supervisory personnel to review and evaluate trades after settlement, including the quality of execution and the amount and the distribution of broker commissions; and (e) supervisory personnel to establish and monitor an approved broker-dealer list and to monitor all broker-dealer commission activity;

2. retain, within 90 days of the date of the Order, at Vanderbilt Capital Advisors's expense, an Independent Review Person ("Review Person"), acceptable to the Commission's staff, to conduct a comprehensive review of Vanderbilt Capital Advisors's senior portfolio manager supervisory and trade review procedures, including those set forth above. The Review Person is to review whether such procedures have been effectively implemented, maintained, and followed. The Review Person shall also recommend such other procedures (or amendments to existing procedures), if any, as are necessary and appropriate reasonably to prevent and detect adjusted trading and trading at prices not reasonably related to the prevailing market prices. The Review Person will prepare a written report ("Report") of his or her findings and recommendations within 120 days of the date of this Order. Vanderbilt Capital Advisors will be provided a reasonable opportunity to comment on the Review Person's Report;

3. adopt and implement, within 30 days after receipt of the Report, at Vanderbilt Capital Advisors's expense, such procedures as recommended by the Review Person as provided in paragraph IV.C.2 above; provided, however, that as to any of the Review Person's recommendations that Vanderbilt Capital Advisors determines is unduly burdensome, Vanderbilt Capital Advisors may propose an alternative procedure reasonably designed to accomplish the same objectives. The Review Person shall reasonably evaluate such alternative procedure and, if appropriate, either approve the alternative procedure or amend his or her recommendation. If the Review Person does approve the alternative procedure or amends a recommendation, the Review Person shall, within 14 days of such decision, prepare a written report which identifies such alternative procedure or amended recommendation, sets forth the Review Person's reasons for his or her decision, and sets the time period within which Vanderbilt Capital Advisors shall adopt and implement the alternative procedure or amended recommendation ("Supplemental Report"). Vanderbilt Capital Advisors shall abide by the decision of the Review Person;

4. authorize the Review Person to provide copies of the Report to the Commission's Atlanta District Office within 120 days of the date of this Order;

5. authorize the Review Person to provide copies of the Supplemental Report, if any, to the Commission's Atlanta District Office within seven (7) days of the date of the Supplemental Report's preparation;

6. cooperate fully with the Review Person and cause its affiliates to cooperate fully with the Review Person, including obtaining the cooperation of Vanderbilt Capital Advisors's employees and other persons under its control;

7. require the Review Person to enter into an agreement, providing that: (a) for the period of engagement and for a period of two (2) years from the completion of the engagement, the Review Person shall not enter into any employment, consultant, attorney-client, auditing, or other professional relationship with Vanderbilt Capital Advisors, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such; and (b) any firm with which the Review Person is affiliated or with which he or she is a member, and any person engaged to assist the Review Person in performance of his or her duties under this Order shall not, without prior written consent of the Commission, enter into any employment, consultant, attorney-client, auditing, or other professional relationship with Vanderbilt Capital Advisors, or any of its present or former affiliates, directors, officers, employees, or agents in their capacity as such for the period of the engagement and for a period of two (2) years after the engagement;

D. nothing herein shall prevent Vanderbilt Capital Advisors from adopting additional policies and procedures or improving upon the policies and procedures adopted pursuant to its undertaking; and

E. for good cause shown, and upon receipt of a timely application from the Review Person or Vanderbilt Capital Advisors, the Atlanta District Office may extend any of the procedural dates set forth above.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

1 The findings herein are made pursuant to Vanderbilt Capital Advisors's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.