UNITED STATES OF AMERICA
In the Matter of
Millennium Capital Advisors
|ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING AND-DESIST ORDER PURSUANT TO SECTIONS 203(e), 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Millennium Capital Advisors of Pennsylvania, Inc. ("Millennium" or "Penn Street") and Louis J. Sozio ("Sozio") (collectively "Respondents").
In anticipation of the institution of these proceedings, the Respondents have submitted Offers of Settlement ("Offers"), 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 without admitting or denying the findings contained herein, except those findings pertaining to the jurisdiction of the Commission over them and over the subject matter of these proceedings, which they admit, Respondents each consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Order"), as set forth below.
On the basis of this Order and the Offers submitted by the Respondents, the Commission finds1 that:
1. Millennium Capital Advisors of Pennsylvania, Inc., located in Malvern, Pennsylvania, is the successor name of Penn Street Advisors, Inc., which was the name of the company during the time of the violations alleged herein. Penn Street registered as an investment adviser with the Commission in 1998, when it was acquired by Millennium Bank. Penn Street was then succeeded by Millennium, which withdrew its registration as an investment adviser on June 4, 2002.
2. Louis J. Sozio, age 60, is a resident of Maple Glen, Pennsylvania. During the relevant period, Sozio was vice-president and compliance officer of Penn Street, managing director for trusts at Millennium Bank, and president of East Coast Consultants, Inc., a registered broker-dealer. Prior to his employment with Millennium Bank, Sozio was employed for over 30 years in the trust department of two large regional banks.
B. Portfolio Manager's Fraudulent Trading
3. From February 1999 through April 2000, a portfolio manager employed by Penn Street ("Portfolio Manager") engaged in unauthorized equity trading in an account of one of the firm's advisory clients. The Portfolio Manager was the sole architect and perpetrator of the fraudulent trading.
4. In February 1999, the client's account was valued at approximately $6 million. At all relevant times, the Portfolio Manager was aware that the client had expressly directed that investments in the account were to be restricted to government-backed securities only. Notwithstanding his awareness of this restriction and without authorization to deviate from it, the Portfolio Manager traded aggressive growth stocks in the client account during this period. As a result of his unauthorized trading, the client account lost approximately $1.2 million, most of which occurred in March 2000.
5. The Portfolio Manager concealed his unauthorized trading by lying to the client and by creating and sending to the client false account statements for the period April 1999 through July 1999.
C. Inadequate Supervision by Penn Street and Sozio
6. Penn Street failed reasonably to supervise the Portfolio Manager and lacked adequate systems or procedures designed to prevent or detect such unauthorized trading. Moreover, Sozio, the Portfolio Manager's immediate supervisor, failed to exercise reasonable care in carrying out his supervisory duties.
7. Penn Street's procedures lacked the detail necessary to establish an effective program to detect and prevent fraud. Specifically, the firm's Compliance Manual stated only that "[c]ontrols should include periodic checks, possible reviews and verification procedures." The Compliance Manual did not provide any additional details regarding internal controls for account review or supervision.
8. The problems created by the firm's vague procedures were exacerbated by the fact that control over all of Penn Street's trading, compliance, and administrative operations were effectively vested in one person, the Portfolio Manager. Most importantly, the Portfolio Manager: (i) determined investment strategies and executed all trades; (ii) controlled all in-coming and out-going mail, including customer account statements and order confirmations; (iii) created and maintained all compliance reports; and (iv) in the case of the client account at issue, created customized account statements, which he was responsible for mailing to the client. Penn Street's procedures did not provide for any independent verification or review of these external and internal reports. The Portfolio Manager took advantage of this lack of separation of controls to operate his fraud without detection by the firm.
9. Penn Street's inadequate internal procedures were compounded by Sozio's failure to follow the few written procedures that did exist as well as his failure to exercise diligence in supervising the Portfolio Manager. For example, Sozio failed to conduct any meaningful verification of client accounts to ensure that client objectives were being met. In this regard, Sozio knew that the client account at issue was supposed to trade only government-backed securities; yet the trade blotter and other internal reports, some of which the Portfolio Manager had falsified to conceal his activities, nevertheless showed that the Portfolio Manager was trading equities in the account.
10. Moreover, instead of independently monitoring the Portfolio Manager's trading activity by thoroughly reviewing internally and externally generated records (including compliance reports, trade blotters, commission statements, trade confirmations and custodial statements), Sozio relied almost exclusively on the Portfolio Manager's verbal representations, which he sought only on occasion. When Sozio conducted an independent review of the records, his reviews were so cursory that he could not have reasonably expected to detect any trading irregularities.
11. Finally, Penn Street, through the Portfolio Manager, failed to keep true, accurate and complete copies of its books and records including customer account statements and trade blotters. Specifically, the Portfolio Manager created and maintained false client account statements, false compliance reports and inaccurate trade blotters. The Portfolio Manager was responsible for the creation, maintenance and distribution of the false documents described above.
12. Based on the above-described conduct, the Portfolio Manager, by use of the means and instruments of transportation and communication in interstate commerce, the means and instrumentalities of interstate commerce, the mails, or the facilities of a national securities exchange, directly or indirectly, willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; willfully aided and abetted and caused violations of Sections 206(1) and 206(2) of the Advisers Act; and willfully aided and abetted and caused Penn Street's violations of Section 204 of the Advisers Act and Rules 204-2(a)(1), (3) and (7) thereunder.
13. Based on the above-described conduct, Penn Street:
a. willfully violated Section 204 of the Advisers Act and Rules 204-2(a)(1), (3) and (7) thereunder in that, through the Portfolio Manager, it failed to make and keep true, accurate and current books and records relating to its investment advisory business; and
b. failed reasonably to supervise the Portfolio Manager within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing the Portfolio Manager's violations of the securities laws.
14. Based on the above-described conduct, Sozio failed reasonably to supervise the Portfolio Manager within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing the Portfolio Manager's violations of the securities laws.
15. Millennium has filed a Form ADV-W withdrawing its registration with the Commission as an investment adviser.
In view of the foregoing, the Commission deems it necessary and appropriate in the public interest to accept the Offers made by Millennium and Sozio and to impose the sanctions set forth therein.
Accordingly, IT IS HEREBY ORDERED that:
1. Millennium be, and hereby is, censured;
2. Millennium shall cease and desist from committing or causing any violation and any future violations of Section 204 of the Advisers Act and Rules 204-2(a)(1), (3) and (7) thereunder;
3. Millennium shall, within 10 days of the entry of this Order, pay a civil money penalty of $50,000 to the United States Treasury. 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (d) submitted under cover of a letter that identifies Millennium as a Respondent in these proceedings, the file number of these proceedings and the Commission's case number. A copy of the cover letter and money order or check shall be sent to District Administrator, Securities and Exchange Commission, Philadelphia District Office, 601 Walnut Street, Suite 1120E, Philadelphia, PA 19106;
4. Sozio be, and hereby is, suspended from association with any investment adviser for a period of three months, effective on the second Monday following the entry of this Order;
5. Sozio be, and hereby is, suspended from acting in any supervisory capacity with any investment adviser for a period of nine months immediately following the period of his suspension from association;
6. Sozio shall provide to the Commission within 30 days after the end of the suspension period described in subparagraph 5 above, an affidavit stating he has complied fully with the sanction described in subparagraphs 4. and 5. above; and
7. Sozio shall, within 10 days of the entry of this Order, pay a civil money penalty of $10,000 to the United States Treasury. 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (d) submitted under cover of a letter that identifies Sozio as a Respondent in these proceedings, the file number of these proceedings and the Commission's case number. A copy of the cover letter and money order or check shall be sent to District Administrator, Securities and Exchange Commission, Philadelphia District Office, 601 Walnut Street, Suite 1120E, Philadelphia, PA 19106.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.
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