Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
ZION CAPITAL MANAGEMENT LLC, and
January 29, 2003
|APPEARANCES:||Robert M. Fusfeld and Leslie Hendrickson-Hughes for
the Division of Enforcement, Securities and Exchange Commission
Robert T. McAllister of Robert T. McAllister, PC, for Respondents Zion Capital Management LLC and Ricky A. Lang
|BEFORE:||Carol Fox Foelak, Administrative Law Judge|
This Initial Decision sanctions Zion Capital Management LLC and its owner Ricky A. Lang, who operated a hedge fund for which Zion was the investment adviser. Lang told investors he would operate the hedge fund with the same trading strategy he had used successfully for another entity in which he had a financial interest. Nonetheless, in trading for both he allocated more unprofitable trades to the hedge fund and more profitable trades to the second entity, with the result that the hedge fund lost 60% of its value while the second entity profited. Additionally, Lang discarded or failed to keep required records of his trading. Thus, Lang and Zion violated antifraud and record keeping provisions of the securities laws. The Initial Decision fines Respondents $220,000, orders them to disgorge $211,827 of ill-gotten gains, bars Lang from working as an investment adviser, and imposes cease-and-desist orders.
A. Procedural Background
The Securities and Exchange Commission (Commission) initiated this proceeding by an Order Instituting Proceedings (OIP) on December 20, 2001. The proceeding against Zion Capital Management LLC (Zion) was authorized pursuant to Section 8A of the Securities Act of 1933 (Securities Act), Section 21C of the Securities Exchange Act of 1934 (Exchange Act), Section 203(k) of the Investment Advisers Act of 1940 (Advisers Act), and Section 9(b) of the Investment Company Act of 1940 (Investment Company Act). The proceeding against Ricky A. Lang was authorized pursuant to Section 8A of the Securities Act, Sections 15(b)(6) and 21C of the Exchange Act, Sections 203(f) and 203(k) of the Advisers Act, and Section 9(b) of the Investment Company Act.
The undersigned held a hearing in Denver, Colorado, on June 4-6, 2002. The Division of Enforcement (Division) called five witnesses from whom testimony was taken, including Lang. Lang also testified in Respondents' case. Forty-five exhibits were admitted into evidence, thirty-eight offered by the Division, and seven, by Respondents.1
The findings and conclusions in this Initial Decision are based on the record. Preponderance of the evidence was applied as the standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). Pursuant to the Administrative Procedure Act, 5 U.S.C. § 557(c), the following posthearing pleadings were considered: (1) the Division's August 14, 2002, Proposed Findings of Fact and Conclusions of Law and Brief in Support of Proposed Findings of Fact and Conclusions of Law; (2) Respondents' September 23, 2002, Proposed Findings of Fact and Conclusions of Law and Brief in Support of Proposed Findings of Fact and Conclusions of Law; and (3) the Division's October 3, 2002, Reply Brief. All arguments and proposed findings and conclusions that are inconsistent with this Initial Decision were considered and rejected.
B. Allegations and Arguments of the Parties
The OIP alleges that from at least August 1997 through April 1998, Zion, an investment adviser, and Lang, its owner, offered and sold limited partnership interests in Dominion Fund II, L.P. (Dominion), and that Zion was the general partner of Dominion, which was Zion's only advisory client. Then, the OIP alleges, from April through December 1998 Lang traded equities on behalf of Dominion and another entity in which he had a financial interest - Dominion Asset Management (DAM). The OIP alleges that Lang allocated more unprofitable trades to Dominion and more profitable trades to DAM, such that DAM made a substantial profit and Dominion lost more than 60% of its value. The OIP alleges that Respondents did not inform Dominion's investors about Lang's conflict of interest and trade allocation scheme, and that the offering materials were false or misleading as to how any conflicts would be resolved. Thus, the OIP alleges, Zion and Lang willfully violated antifraud and books and records provisions of the securities laws - Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(1), 206(2), 207, and 204 and Rules 204-2(a)(3) and 204-2(a)(7).
The Division requests that Zion and Lang be jointly and severally ordered to disgorge $990,384 plus prejudgment interest and pay a civil penalty of $550,000. The Division also requests that Zion's registration as an investment adviser be revoked and that Lang be barred from association with any investment adviser or investment company. It also requests cease and desist orders against both.
Respondents deny that Lang allocated trades unfairly and offer alternative explanations for the difference in outcome. Further, they maintain that there were no books and records violations.
II. FINDINGS OF FACT
A. Respondents and Related Entities
1. Ricky A. Lang
Respondent Ricky A. Lang was born in 1961 and has a B.S. in finance; he began working in the securities industry in Denver, Colorado, in 1986. Tr. 261-62, 264. He worked at Malone and Associates, a broker-dealer that traded penny stocks, from 1986 until September 1990. Tr. 262, 264-66, 268. Then he took a year off from working and engaged in surfing, while living with his mother in California. Tr. 266-68. He resumed employment in 1992 as a registered representative and trader with Rocky Mountain Securities and remained there until the end of 1995. Tr. 269-70; Ex. 8, App. I, Sched. F at 2. Thereafter he was considered for employment by Rockmont Value Investors over a period of months, but was never hired and received no compensation. Tr. 270-71. Following the events at issue, Lang became self-employed and is currently trading for his own account. Tr. 460-62.
2. Jayhead and DAM
In April 1996, Lang, Jay Glickman, and three individuals whom Lang knew from Malone and Associates - Doug Mallach, Terry Vickery, and David Dambro - formed Jayhead, a partnership, to trade capital supplied by Glickman, Mallach, Vickery, and Dambro. Lang received an ownership interest - 12.3% during the time at issue - for serving as business manager.2 Tr. 274, 278-80, 400. Lang traded Jayhead's capital under the name of DAM, his wholly owned subchapter S corporation that he formed for the purpose of trading for and receiving compensation from Jayhead. Tr. 275-76, 303, 352. He received 50% of the trading profits and was responsible for 100% of the losses. Tr. 276, 281-82, 400. The profits were calculated and payable monthly.3 Tr. 281-82. During the period April 1, 1998, through December 31, 1998, Lang received $138,498.08 as his 50% share of DAM's trading profits. Tr. 288. Overall, Jayhead had losses during that period, so Lang never received any additional payments as a result of his ownership interest in Jayhead.4 Tr. 282, 400.
Jayhead had a prime brokerage account at Salomon Smith Barney (Smith Barney).5 Tr. 276. The Jayhead "master" account was divided into "sub-accounts." Tr. 277. Lang's portion of Jayhead's portfolio was in the DAM sub-account; up to four other people had similar arrangements to trade a portion of Jayhead's portfolio.6 Tr. 276-77, 350. Each trader could trade only in his own sub-account. Tr. 275-77, 352. However, while trading the separate portfolio in his sub-account Lang had access to $500,000 of capital and the margin of the Jayhead master account. Tr. 309-12. Lang's trading strategy was short-term trading of mostly Nasdaq-listed equities and their derivatives, with small and frequent trades, carrying less than 20%, on average, overnight. Tr. 317-18, 321-22, 401-03; Ex. 6 at 5, 8, Ex. 7 at 5, 8. At the end of the trading day, it was necessary to net the cash flows of the sub-accounts; sometimes Lang had to alter his strategy because of losses by other traders and liquidate positions to accommodate the capital available in the Jayhead account. Tr. 313-15.
3. Zion and Dominion
Respondent Zion Capital Management LLC was organized, and wholly owned, by Lang to be the investment adviser and general partner of Dominion, a hedge fund. Tr. 303-04. Lang's philosophy was that mutual funds are "plagued by SEC regulations and disclosure requirements." Ex. 6 at 5; Ex. 7 at 5. Thus, by structuring Dominion as a hedge fund organized as a limited partnership, "prohibitive SEC regulations and disclosure requirements will be eliminated." Ex. 6 at 3, Ex. 7 at 3. Zion was registered with the Commission as an investment adviser from January 1998 through July 2001. OIP, Answer at ¶ II.A.
The original plan was for Lang, Mallach, Vickery, and Dambro to own Zion. Tr. 304-05; Ex. 6 at 4, Ex. 7 at 4. However, after Lang learned that it would be necessary to disclose the disciplinary history of Mallach, Vickery, and Dambro on Zion's Form ADV, the project went forward with Lang as sole owner. Tr. 292-305; Ex. 8 at 5, Exs. 30-32, 34-36. Lang obtained the necessary legal documents from a mail order service. Tr. 323-24.
Dominion was to pay Zion a management fee of .0375% of net assets, calculated and payable quarterly, and incentive compensation, called "Special Profit Allocation," of 25% of any profits, allocated at the end of each year. Tr. 324, 401; Ex. 8 at 17-18. Investors had limited power to withdraw capital after a year had passed. Ex. 8 at 27. In fact, due to Dominion's losses, Zion and Lang took no management fees and relinquished the 1.2% ownership in Dominion that Lang had taken in lieu of organizational expenses. Tr. 305.
B. Marketing Dominion to Investors
To market Dominion, Lang contacted a North Carolina broker, Jim Hicks, through an associate of Vickery. Tr. 305-06. The three investors in Dominion were solicited by Hicks and his associate, Brian McGuane. Lang provided the brokers with marketing materials titled "Investment Summary," dated August 1997 and January 1998, and the Offering Circular. Tr. 307-08; Exs. 6-8. The investors, Patrick L. Tighe, Craig Alan Westman, and James Robert Anderson, received the marketing and offering materials. Tr. 139-40, 142, 161, 165, 180, 182; Exs. 6-8. They were impressed with Lang's historical trading record contained in the Investment Summaries. Tr. 141, 162-64, 180-82; Exs. 6-7. Lang proposed to use the same "investment and trading strategy that has been tested in real time market conditions" in operating DAM. Tr. 315-16, 453; Ex. 6 at 5, 8, Ex. 7 at 5, 8, Ex. 8 at 5. Lang stated that the profitability achieved with DAM could be "actually improved upon with a larger capital base." Tr. 364, Ex. 6 at 5, Ex. 7 at 5. The investors did not attempt to understand the marketing and offering materials but rather relied on Hicks and McGuane.7 Tr. 138-39, 153-54, 160, 162, 165-66, 180-81, 189. Tighe invested $150,000, Westman, $57,053, and Anderson, $962,611.8 Tr. 142, 169, 184. Lang had hoped to raise at least $5 million. Tr. 306.
The Offering Circular included Part II of Zion's Form ADV filed with the Commission. Ex. 8, App. I. It represented that Lang's association with DAM ended in December 1997. Ex. 8, App. I, Sched. F. at 2. It also stated, "[Zion] is or may in the future sponsor, manage or participate in other securities investment activities and programs unrelated to [Dominion's] business (some of which may compete with [Dominion's] investment activities)." Ex. 8 at 6. The Offering Circular went on to refer to possible conflicts of interest between Dominion and other accounts and stated, "[Zion] will attempt to resolve all such conflicts in a manner that is fair to all such interests." Ex. 8 at 6. Lang diminished the importance of this language by saying that it was merely part of the cookie-cutter format that he purchased. Tr. 326. He conceded that he did not understand some of the language in the Offering Circular. Tr. 327.
The Form ADV confirmed that Zion "or a related person" recommends to clients that they buy or sell securities in which Zion or a related person has some financial interest and that it buys or sells for itself securities that it also recommends to clients. Ex. 8, App. I at 5. This was amplified by a representation that Zion personnel would refrain from trading a security for personal accounts for one day after a transaction in that security for client accounts. Ex. 8, App. I, Sched. F at 3. Lang interpreted this language to apply to an account held in his own name, and not to the DAM account in which he traded capital owned by others. Tr. 331-33.
The Offering Circular represented that Lang's business background included association with Malone and Associates from September 1987 to November 1991 and association with Rockmont Value Investors as a trader from January to June 1996. Ex. 8 at 5, Ex. 8, App. I, Sched. F. at 2.
After obtaining capital from the investors, Lang commenced trading for Dominion in April 1998, while continuing to trade for DAM. Exs. 103, 106. Lang had a Nasdaq Stock Market, Inc., (Nasdaq) Level 2 computer that enabled him to see price quotes and other trading information on securities on a real-time basis. Tr. 238, 290-92. Lang settled trades via an omnibus account at Smith Barney. The omnibus account allowed him to group trades in a security and then allocate the positions into DAM's and Dominion's individual prime brokerage accounts. Tr. 19-20, 42-45; Ex. 40. Thus, Lang might buy 1,000 shares of a security and allocate 500 shares to DAM and 500 to Dominion, instead of having to engage in two 500-share transactions.
Lang executed 68% of the trades for DAM and for Dominion through Market Wise Securities, Inc., (Market Wise), an on-line broker-dealer, during the period April 1 through December 31, 1998.9 Tr. 37, 335. Market Wise was instructed to settle the trades through the Smith Barney omnibus account. Tr. 39-41; Exs. 20, 21. The trades were ultimately settled in the individual DAM and Dominion prime brokerage accounts according to allocation instructions provided by Lang to Smith Barney after the close of each trading day; the same procedure was followed when Lang traded through a broker other than Market Wise. Tr. 42-44, 339-41. DAM and Dominion each had its own account at Market Wise, but if Lang placed an order in one account, he could allocate the shares to the other through instructions to Smith Barney. Tr. 33-36. Lang did most of the Market Wise trading while logged on to the DAM account. Tr. 45-50, 336-37; Exs. 25, 39. He explained that to log off and then log on to the other account would waste time, and he might even be disconnected and not be able to get back on. Tr. 336-37.
D. Record Keeping
Lang made contemporaneous handwritten notes of his trading. Tr. 339-40, 420. He did not retain the notes after preparing handwritten trade blotters based on the notes. Tr. 341, 346, 352-53. He did not understand the contemporaneous notes' importance at the time. Tr. 346. At the end of each trading day Lang prepared handwritten trade blotters for DAM and for Dominion in which he aggregated trades in each security and averaged the prices. Tr. 339-41, 401-02; Ex. 18. That is, if he had made twenty buys of a security in small blocks totaling 5,000 shares, he would enter one buy of 5,000 shares at an average price. Tr. 340-41, 402. Then, based on the trade blotters, Zion sent instructions via e-mail or facsimile to Smith Barney as to which trades were for DAM and which were for Dominion. Tr. 338-39, 352, 385-86, 419. Lang did not retain the allocation instructions. Tr. 352-53.
At the time of the Commission's investigation in late 1998 and 1999, Lang no longer had DAM's trade blotter and had only a photocopy of Dominion's. Tr. 58-59, 341-42; Ex. 18. The Dominion blotter is not completely legible; even Lang is not sure what some of the entries are. Tr. 343-47; Ex. 18. When compared to Smith Barney account statements, the Dominion blotter also contains inaccuracies, such as missing data on cancelled trades, missing trades, misidentification of the nature of the trade, or incorrect prices. Tr. 59-71; Exs. 18, 23.
Lang's record keeping did not include providing the investors with timely reports on Dominion's performance.10 The Offering Circular represented that Zion would provide investors with quarterly reports of Dominion's performance. Tr. 333; Ex. 8, App. I, Sched. F at 3. The investors testified that they did not receive quarterly reports during 1998. Tr. 143-45, 171, 186-87; Ex. 13. Lang testified that he believed that he sent out the reports sometime in 1998, but could not recall the date. Tr. 333-34. He conceded that Hicks called him to complain that the investors were not receiving quarterly reports. Tr. 335. In light of the investors' testimony, Lang's recollection of Hicks's complaint, and the absence of any affirmative evidence about the reports beyond Lang's vague recollection, it is found that Zion did not send quarterly reports to investors in 1998.
E. DAM's Profits, Dominion's Losses
The starting value for DAM was $220,241, and for Dominion, $1,169,665.11 Tr. 213, 233, 249-50; Ex. 1. While not challenging the $220,241 value, Lang maintained that he had access to $500,000 of capital to trade in the DAM account every month throughout 1998, as he had earlier. Tr. 309-10, 319-20; Exs. 6-7. He explained the relationship of the $500,000 value to DAM in a manner that was not entirely illuminating but that emphasized that DAM and the other Jayhead sub-accounts were capitalized by Jayhead. Tr. 312, 319-20. Since the $500,000 value does not appear on any account statement and is not useful in computing changes in the value of the DAM account (since Lang maintained he had $500,000 every month), $220,241 is accepted as the starting value of the DAM account.
As of December 31, 1998, the value of the DAM account was $104,820, and $351,832 had been withdrawn from that account in the interim; subtracting the starting value from the total of these indicates an increase of $236,411. Tr. 232-33. Similarly, the ending balance of the Dominion account was $456,277, with $14,208 withdrawn for expenses, for a decrease of $699,180. Tr. 233. The net loss of the two accounts was $462,769. An allocation of the loss proportionate to the accounts' starting values is a loss of $73,329 for DAM and $389,440 for Dominion.
Lang's trading was illustrated in varying ways in the evidence. Tr. 370-74, 376-84; Exs. 1-5, 41-44, 102, 103, 106, 108, 110-12. Nonetheless, the fact remains that, despite representations that he would operate Dominion using the same "investment and trading strategy that has been tested in real time market conditions" in operating DAM, the outcomes were markedly different. DAM showed a profit, and Dominion lost about 60% of its value during the same time period. The Division maintains that the evidence shows that Lang allocated trades unequally, assigning more profitable trades to DAM and more losing trades to Dominion.12 The Division theorizes that Lang allocated the trades at the end of the day when he knew whether or not they were profitable. Lang testified that he allocated trades as they occurred during the day and merely reported the allocations at the end of the day to Smith Barney. Tr. 419-21. Lang maintains that there are other explanations for the two accounts' inconsistent results. The evidence supports the Division's theory; Lang's alternative explanations are not persuasive.
1. Lang's Explanations
In an October 1999 letter to the Commission, Lang attributed the difference in outcomes to the difference in size of the two accounts, illiquid and volatile markets, and carrying positions overnight in Dominion.13 Tr. 359-61; Ex. 15. Illiquidity and volatility would affect both funds similarly, however, as their transactions were of similar sizes. Tr. 233-35, 366, 378. As to the accounts' difference in size, Dominion would be expected to be more profitable than DAM because it was larger. Tr. 317, 364; Ex. 6 at 5, Ex. 7 at 5. Finally, Lang's explanation that capital demands of the other Jayhead traders prevented him from carrying positions overnight in DAM is an unconvincing explanation for his actions in Dominion; Lang had represented that he would be using the same trading strategy for both.
At the hearing, Lang's explanation for the difference also included a rule change concerning the Small Order Execution System (SOES) that he said began to affect him in October 1998.14 Tr. 368-70, 405-14; Exs. 111-112. He learned of the rule change in January 1999. Tr. 368-69, 406-07. Lang believed that the rule change made it more difficult to engage in transactions larger than 100 shares. Tr. 369-70, 407-08. Thus, he claimed, it had an adverse impact on the key to his trading strategy, which was being able to get out of a position quickly. Tr. 318, 407-08, 413; Ex. 6 at 6, Ex. 7 at 6. However, evaluation of Lang's trading for the months of July and November, before and after the rule change, shows that the size of the transactions in each account was similar. Tr. 233-37; Ex. 1. Thus, the rule change does not explain the difference in outcomes. Further, while both DAM and Dominion experienced substantial losses in November and December, Dominion lost value every month except September, while DAM had gains in most other months. Tr. 254-57; Exs. 1, 103, 106, 108, 110.
Lang allocated some profitable trades to Dominion, for example, a July 10 transaction in Wavephore, symbol WAVO. Tr. 387, 457-58; Ex. 18 at Z001876, Ex. 23 at 90. Lang points to this fact as indicating that he treated both accounts fairly. However, the fact that Lang did not favor DAM with every trade does not mean that he did not favor it with most trades.
2. Lang Allocated Trades to Favor DAM
It is found that Lang allocated trades at the end of the day, unequally favoring DAM. After the close of trading, he could estimate the profit or loss on each of the day's trades, using information, for example, from the Level 2 machine. The undersigned infers, from Lang's failure to retain them, that his contemporaneous notes of trading for each account were not fully consistent with the allocation instructions sent to Smith Barney. This explanation for the difference in profitability is consistent with additional salient facts: While Lang had a financial interest in both Dominion and DAM, he was paid for profitable trading for DAM every month, but would not be paid until a year had elapsed for any profits he achieved for Dominion. Lang had promised to provide quarterly reports to Dominion investors, but did not do so during 1998. Lang began to take greater risks with Dominion's trading at the end of 1998, carrying more than 20% of its positions overnight. If Lang could have reversed Dominion's losses before accounting to investors and before the time when they could withdraw capital, both he and the investors would have profited, and the investors would not have had an incentive to withdraw.
III. CONCLUSIONS OF LAW
In this section it is concluded that Lang and Zion willfully violated the antifraud provisions of the Securities, Exchange, and Advisers Acts - Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(1) and (2) - and willfully violated Advisers Act Section 207. Further, it is concluded that Zion willfully violated Advisers Act Section 204 and Rules 204-2(a)(3) and 204-2(a)(7), and that Lang caused and willfully aided and abetted Zion's violations.
A. Antifraud Provisions
Section 17(a) of the Securities Act makes it unlawful "in the offer or sale of" securities, by jurisdictional means, to:
1) employ any device, scheme, or artifice to defraud,
2) obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary to make the statement made not misleading, or
3) engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe similar practices "in connection with" the purchase or sale of securities. Similar proscriptions are contained in Sections 206(1) and (2) of the Advisers Act. Section 207 of the Advisers Act makes it unlawful for "any person willfully to make" material misstatements and omissions in applications and reports filed with the Commission under the Advisers Act.
Scienter is required to establish violations of Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(1). It is "a mental state embracing intent to deceive, manipulate, or defraud." Aaron v. SEC, 446 U.S. 680, 686 n.5, 695-97 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976); SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992). Recklessness can satisfy the scienter requirement. See David Disner, 52 S.E.C. 1217, 1222 & n.20 (1997); see also Steadman, 967 F.2d at 641-42; Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990). Reckless conduct is conduct which is "`highly unreasonable' and represents `an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978) (quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977)).
Material misrepresentations and omissions violate Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Sections 206(2) and 207. The standard of materiality is whether or not a reasonable investor or prospective investor would have considered the information important in deciding whether or not to invest. See Steadman, 967 F.2d at 643; see also Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 240 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Investment advisers are fiduciaries and have an affirmative duty of utmost good faith and full and fair disclosure of all material facts. See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 191-92, 194, 201 (1963).
Zion is accountable for the actions of its responsible officers, including Lang. See C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1435 (10th Cir. 1988); A.J. White & Co. v. SEC, 556 F.2d 619, 624 (1st Cir. 1977). A company's scienter may be imputed from that of the individuals controlling it. See SEC v. Blinder, Robinson & Co., 542 F. Supp. 468, 476 n.3 (D. Colo. 1982) (citing SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1096-97 nn.16-18 (2d Cir. 1972)). As an associated person of Zion, Lang's conduct and scienter are also attributed to the firm. See Section 203(e) of the Advisers Act.
The Division requests sanctions pursuant to Sections 8A of the Securities Act, 15(b)(6), 21B, and 21C of the Exchange Act, 9(b), (d), and (e) of the Investment Company Act, and 203(f), (k), (i), and (j) of the Advisers Act. The Commission must find willful violations to impose sanctions under Sections 15(b) and 21B of the Exchange Act, 9(b) and (d) of the Investment Company Act, and 203(f) and (i) of the Advisers Act. A finding of willfulness does not require an intent to violate, but merely an intent to do the act which constitutes a violation. See Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000); see also Steadman v. SEC, 603 F.2d 1126, 1135 (5th Cir. 1979); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).
Respondents argue that the investors did not rely on the marketing materials and Offering Circular in deciding to invest; rather, they relied on the recommendations of Hicks and McGuane. Respondents also argue that any misstatement or omission in the marketing materials and Offering Circular did not relate to the actual trading and losses and thus was not material. These arguments are unavailing. Reliance by investors is not a necessary element of the violation in Commission proceedings to enforce the antifraud provisions. See Martin Herer Engelman, 52 SEC 271, 283 n.43 (1995) (citing SEC v. Rana Research, Inc., 8 F.3d 1358, 1363-64 (9th Cir. 1993); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985); SEC v. North Am. Research & Dev. Corp., 424 F.2d 63, 84 (2d Cir. 1970)); Richard C. Spangler, Inc., 46 SEC 238, 244 (1976) (citing Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969). Nor is proof that injury resulted from the fraudulent practice a necessary element of the violation. See SEC v. Capital Gains Research Bureau, 375 U.S. at 195 (holding that enforcement action against a practice that operates as a fraud or deceit on a client does not require proof of intent to injure and actual injury to the client.)
B. Antifraud Violations
The record shows Lang's scienter, which is attributed to Zion. Lang's conduct was reckless - highly unreasonable and an extreme departure from the standards of ordinary care. The underpinning of Lang's reckless conduct was his disdain for Commission regulations and disclosure requirements. Lang's misrepresentation of his business background exemplifies his attitude toward the importance of disclosure.15 Lang's failure to supply the promised quarterly reports in 1998 exemplifies his attitude toward the importance of living up to his representations. Added to Lang's disdain for Commission regulations and disclosure requirements was his disinterest in understanding the representations in the Offering Circular and Form ADV. Lang admitted that he did not understand some of the language in the Offering Circular and Form ADV, yet he did not seek to learn what the language meant so that his representations and actions would conform. An example is his belief that the one-day ban on trading in securities that Dominion traded did not apply to DAM. This belief, based on the idea that DAM was not a person, was not consistent with the Advisers Act. Section 202(16) of the Advisers Act provides, "'Person' means a natural person or a company."
Despite Lang's representations that he would use the same strategy for Dominion as for DAM and that he would resolve all conflicts of interest fairly, he had no method of ensuring that his allocations between DAM and his investment advisory client Dominion were fair. His method of record keeping - jotting notes on his trades during the day and discarding the notes at the end of the day after reporting to Smith Barney - is an indication of his recklessness, as is his failure to foresee the problems that would arise from his record keeping methods.
It is concluded that Lang's pattern of favoring DAM over Dominion in allocating profitable and unprofitable trades, contrary to representations that he would resolve such conflicts fairly, was a scheme to defraud within the meaning of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5, and Advisers Act Section 206. Lang's violative actions are attributed to Zion.
2. Material Misrepresentations
Dominion's Offering Circular disclosed the possibility of a conflict of interest with other investment activities of Lang and represented that Respondents would "attempt to resolve all such conflicts in a manner that is fair to all such interests." This was a misrepresentation. In fact, Lang resolved the conflict of interest between DAM and Zion's advisory client Dominion by consistently favoring DAM and disfavoring Dominion in allocating profitable and unprofitable trades. Similarly, Zion's Form ADV represented, as to conflicts of interest between client transactions and those of Zion "or a related person," that Zion personnel would refrain from trading a security for personal accounts for one day after a transaction in that security for client accounts. This was also a misrepresentation in light of Lang's trading for Dominion and DAM. Lang's interpretation that this policy applied to an account held in his own name, but not to DAM's account is not consistent with the Advisers Act. The misrepresented information in Dominion's Offering Circular and Zion's Form ADV were clearly material. Lang's actions are attributed to Zion, and vice versa.
It is concluded that Lang and Zion violated the antifraud provisions of the Securities, Exchange, and Advisers Acts by the material misrepresentations in marketing materials and Offering Circular. Additionally, Lang and Zion violated Section 207 of the Advisers Act by their material misrepresentations in Zion's Form ADV filed with the Commission. The acts that constituted Respondents' violations were clearly intentional. Thus, their violations were willful.
C. Books and Records Provisions
The OIP charged Zion with willfully violating Section 204 of the Advisers Act and Rules 204-2(a)(3) and 204-2(a)(7) thereunder, and Lang with causing and willfully aiding and abetting Zion's violations. Section 204 provides that investment advisers "shall make and keep for prescribed periods such records . . . as the Commission, by rule, may prescribe as necessary or appropriate in the public interest." Rule 204-2 prescribes the books and records that investment advisers are required to maintain and requires that they be "true, accurate, and current." Specifically, Rule 204-2(a)(3) requires an investment adviser to keep memoranda of orders given by the investment adviser for the purchase or sale of any security.16 Rule 204-2(a)(7) requires an investment adviser to keep written communications relating to recommendations, advice, receipt or delivery of funds or securities, and the placing or execution of any order to purchase or sell securities.17 Rule 204-2(e)(1) requires these records to be retained for five years.18
1. Aiding and Abetting; Causing
For aiding and abetting liability under the federal securities laws, three elements must be established: (1) a primary or independent securities law violation committed by another party; (2) awareness or knowledge by the aider and abettor that his or her role was part of an overall activity that was improper; also conceptualized as scienter in aiding and abetting antifraud violations; and (3) that the aider and abettor knowingly and substantially assisted the conduct that constitutes the violation. See Graham v. SEC, 222 F.3d 994, 1000 (D.C. Cir. 2000); Woods v. Barnett Bank, 765 F.2d 1004, 1009 (11th Cir. 1985); Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); Woodward v. Metro Bank, 522 F.2d 84, 94-97 (5th Cir. 1975); SEC v. Coffey, 493 F.2d 1304, 1316-17 (6th Cir. 1974); Russo Sec. Inc., 53 S.E.C. 271, 278 & n.16 (1997); Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995); William R. Carter, 47 S.E.C. 471, 502-03 (1981). A person cannot escape aiding and abetting liability by claiming he was ignorant of the securities laws. See Sharon M. Graham, 53 S.E.C. 1072, 1084 n.33 (1998), aff'd, 222 F.3d 994 (D.C. Cir. 2000). The knowledge or awareness requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or active participant. See Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990); Cornfeld, 619 F.2d at 923, 925; Rolf v. Blythe, Eastman Dillon & Co. Inc., 570 F.2d at 47-48; Woodward, 522 F.2d at 97.
A respondent who aids and abets a violation also is a cause of the violation, within the meaning of Section 203(k) of the Advisers Act. See Graham, 53 S.E.C. at 1085 n.35. Negligence is sufficient to establish liability for causing a primary violation that does not require scienter. See KPMG Peat Marwick LLP, 74 SEC Docket 384, 421 (Jan. 19, 2001), recon. denied, 74 SEC Docket 1351 (Mar. 8, 2001), aff'd, 289 F. 3d 109 (D.C. Cir. 2002), reh. den., 2002 App. LEXIS 9119 (July 16, 2002).
D. Books and Records Violations
Zion violated Advisers Act Section 204 and Rule 204-2(a)(3) because it failed to keep and maintain "memoranda of orders given by [Zion] for the purchase or sale of any security." To the extent that Lang's contemporaneous handwritten notes were such memoranda of orders, the Section 204 and Rule 204-2(a)(3) were violated because Zion discarded the notes every day and did not maintain them for five years. Similarly, the illegible, inaccurate photocopy of Dominion's handwritten trade blotter on which allocation instructions sent to Smith Barney were based, does not meet the requirements of Rule 204-2(a)(7), which required Zion to keep "copies of all written communications sent by [Zion] relating to . . . the placing or execution of any order to purchase or sell any security."
Concerning the allegation that Lang aided and abetted these books and records violations, Zion's primary violation has been established. The remaining elements - substantial assistance and knowledge - are present as well. Lang was the sole owner of Zion, he failed to keep the "memoranda of orders" that he placed, and failed to ensure that the "written communications . . . relating to the placing or execution" of his orders were retained. Lang conceded he was not aware of the handwritten notes' importance as a record that he was required to keep. He was clearly reckless in failing to adhere to minimum record keeping requirements for an investment adviser. The awareness or knowledge requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or an active participant, and Lang was both.
It is concluded that Zion willfully violated, and Lang willfully aided and abetted and caused Zion's violations of, Advisers Act Section 204 and Rules 204-2(a)(3) and 204-2(a)(7). The acts that constituted Respondents' violations were clearly intentional. Thus, their violations were willful.
The Division requests a cease and desist order against each Respondent. It requests that Lang and Zion, jointly and severally, be ordered to disgorge $990,384 and to pay a civil penalty of $550,000. It also requests that Lang be barred from association with any investment adviser or investment company.19
For the reasons discussed below, these sanctions will be ordered: a cease and desist order against Lang and Zion; disgorgement of $211,827 from Respondents, jointly and severally; civil money penalties of $220,000 against Respondents, jointly and severally; and a bar of Lang from association with an investment adviser or investment company.
A. Sanction Considerations
When the Commission determines administrative sanctions, it considers:
[T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.
Steadman v. SEC, 603 F.2d at 1140 (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)).
The Commission determines sanctions pursuant to a public interest standard.20 Thus, in addition to issues related to the violator, it "weigh[s] the effect of [its] action or inaction on the welfare of investors as a class and on standards of conduct in the securities business generally." Arthur Lipper Corp., 46 S.E.C. 78, 100 (1975); see also Spangler, 46 S.E.C. at 254 n.67. The amount of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. See Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211-12 (1975).
1. Cease and Desist
Sections 8A of the Securities Act, 21C of the Exchange Act, and 203(k) of the Advisers Act authorize the Commission to issue a cease-and-desist order against a person who "is violating, has violated, or is about to violate" any provision of the Acts or rules thereunder. Whether there is a reasonable likelihood of such violations in the future must be considered. See KPMG, 74 SEC Docket at 429. In determining whether a cease-and-desist order is appropriate, the Commission considers the Steadman factors quoted above, as well as the recency of the violation, the degree of harm to investors, and the combination of sanctions against the respondent. See KPMG, 74 SEC Docket at 436.
Respondents' violations were egregious, recurrent, and involved a reckless degree of scienter. Lang's occupation will present opportunities to violate the law in the future. He is presently trading on his own behalf, and his age, education, and experience could enable him to reenter the investment adviser business. Consistent with a vigorous defense of the charges against him, Lang has not affirmatively acknowledged the wrongful nature of his conduct. The violations were recent and harmed investors, increasing their losses by over $300,000. Finally, a cease-and-desist order is appropriate in light of the combination of sanctions ordered, which also include a $220,000 penalty, bar, and disgorgement. Since Lang owns Zion and Zion's violations were implemented through Lang's actions, a cease and desist order against both is appropriate. Accordingly, Lang and Zion will be ordered to cease and desist from committing or causing any violations or future violations of Sections 17(a) of the Securities Act, 10(b) of the Exchange Act and Rule 10b-5 thereunder, 206(1) and (2), 207, and 204 of the Advisers Act, and Rules 204-2(a)(3) and 204-2(a)(7) thereunder.
Sections 8A of the Securities Act, 21C of the Exchange Act, 9(e) of the Investment Company Act, and 203(j) of the Advisers Act authorize the Commission to order Lang and Zion to disgorge ill-gotten gains. Disgorgement is an equitable remedy that requires a violator to give up wrongfully obtained profits causally related to the proven wrongdoing. See SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-32 (D.C. Cir. 1989); see also Hateley v. SEC, 8 F.3d 653, 655-56 (9th Cir. 1993). It returns the violator to where he would have been absent the violative activity. The amount of the disgorgement ordered need only be a reasonable approximation of profits causally connected to the violation. See Laurie Jones Canady, 69 SEC Docket 1468, 1487 n.35 (April 5, 1999) (quoting SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996)); see also SEC v. First Pac. Bancorp, 142 F.3d 1186, 1192 n.6 (9th Cir. 1998) (holding disgorgement amount only needs to be a reasonable approximation of ill-gotten gains); accord First City Fin. Corp., 890 F.2d at 1230-31.
The Division requests disgorgement from Lang and Zion, jointly and severally, of $990,384.21 However, the profits Lang obtained and losses he avoided that are causally related to Respondents' proven wrongdoing amount to $211,827. Disgorgement of that amount, with prejudgment interest, will be ordered against Respondents jointly and severally.22
As found above, the net of Dominion's losses and DAM's profits is a loss of $462,769. Since Lang had represented that he would use the same investment strategy for Dominion as for DAM, it is appropriate to allocate the losses in proportion to their starting values in order to approximate Respondents' ill-gotten gains. The starting value for Dominion was $1,169,665 and for DAM was $220,241. Allocating the losses ratably results in $389,440 in losses for Dominion and $73,329 in losses for DAM. Lang's arrangement with Jayhead was that he was responsible for 100% of losses and could retain 50% of net profits. Under this arrangement Lang received $138,498.08 as his 50% share of DAM's trading profits during the period April 1, 1998, through December 31, 1998, instead of being liable for $73,329 of losses. Thus, his ill-gotten gains - profits obtained plus losses avoided - total $211,827.
3. Civil Money Penalty
Sections 21B of the Exchange Act, 9(d) of the Investment Company Act, and 203(i) of the Advisers Act authorize the Commission to impose civil money penalties for willful violations of those Acts or rules thereunder. In considering whether a penalty is in the public interest, the Commission may consider six factors: (1) fraud or deliberate or reckless disregard of a regulatory requirement; (2) harm to others; (3) unjust enrichment; (4) previous violations; (5) deterrence; and (6) such other matters as justice may require. See Sections 21B(c) of the Exchange Act, 9(d)(3) of the Investment Company Act, and 203(i)(3) of the Advisers Act; New Allied Dev. Corp., 52 S.E.C. 1119, 1130 n.33 (1996); First Sec. Transfer Sys., Inc., 52 S.E.C. 392, 395-96 (1995); see also Jay Houston Meadows, 52 S.E.C. 778, 787-88 (1996); Consolidated Inv. Servs., Inc., 52 S.E.C. 582, 590-91 (1996).
There are no mitigating factors, and there are several aggravating factors. Lang and Zion violated the antifraud provisions. Lang and Zion discarded or failed to keep records that would have been evidence relevant to their antifraud violations. Their books and records violations involved reckless disregard of regulatory requirements, in line with Lang's disdain for Commission regulation and disclosure requirements. Their wrongdoing caused harm to others by increasing the investors' losses by over $300,000. Lang was unjustly enriched by over $200,000 as a result of Respondents' violations. Deterrence requires substantial penalties against Lang and Zion.
Penalties are in the public interest in this case. Penalties in addition to a bar and cease and desist orders are necessary for the purpose of deterrence. See Sections 21B(c)(5) of the Exchange Act, 9(d)(3)(E) of the Investment Company Act, and 203(i)(3)E) of the Advisers Act; see also H.R. Rep. No. 101-616 (1990). Third-tier penalties, as the Division requests, are appropriate because the violative acts involved fraud, reckless disregard of a regulatory requirement and resulted in substantial losses to other persons and substantial pecuniary gain to the violators. See Sections 21B(b)(3) of the Exchange Act, 9(d)(2)(C) of the Investment Company Act, and 203(i)(2)(C) of the Advisers Act.
The maximum third-tier penalty for each act or omission is $110,000 for a natural person and $550,000 for any other person.23 Sections 21B of the Exchange Act, 9(d) of the Investment Company Act, and 203(i) of the Advisers Act, like most civil penalty statutes, leave the precise unit of violation undefined. See Colin S. Diver, The Assessment and Mitigation of Civil Money Penalties by Federal Administrative Agencies, 79 Colum. L. Rev. 1435, 1440-41 (1979). The Division requests that a third-tier penalty of $550,000 be imposed jointly and severally against Lang and Zion, arguing that this would amount to $241 per violative trade for some 2,280 trades.
The events at issue will be considered as two courses of action resulting in two units of violation - the antifraud violations and the books and records violations. Lang and Zion will be ordered, jointly and severally, to pay third-tier penalties of $220,000. In the circumstances of this case, this sum is sufficient for deterrence and other purposes of the penalty statutes.
As the Division requests, and based on the factors enunciated in Steadman v. SEC, 603 F.2d at 1140, Lang will be barred from association with any investment adviser or investment company. These remedies are authorized by Sections 9(b) of the Investment Company Act and 203(f) of the Advisers Act. Combined with other sanctions ordered, these remedies are in the public interest and an appropriate deterrent. The violations involved scienter. Lang's business presents him with the opportunity to commit violations of the securities laws in the future. The record shows a lack of recognition of the wrongful nature of their conduct. Lang is currently engaged in trading securities. In short, it is necessary for the public interest and the protection of investors that Lang be barred.
V. RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), it is certified that the record includes the items set forth in the record index issued by the Secretary of the Commission on July 23, 2002.
Based on the findings and conclusions set forth above:
IT IS ORDERED that, pursuant to Sections 8A of the Securities Act, 21C of the Exchange Act, and 203(k) of the Advisers Act:
RICKY A. LANG CEASE AND DESIST from committing or causing any violations or future violations of Sections 17(a) of the Securities Act, 10(b) of the Exchange Act and Rule 10b-5 thereunder, 206(1) and (2), 207, and 204 of the Advisers Act, and Rules 204-2(a)(3) and 204-2(a)(7) thereunder; and
ZION CAPITAL MANAGEMENT LLC CEASE AND DESIST from committing or causing any violations or future violations of Sections 17(a) of the Securities Act, 10(b) of the Exchange Act and Rule 10b-5 thereunder, 206(1) and (2), 207, and 204 of the Advisers Act, and Rules 204-2(a)(3) and 204-2(a)(7) thereunder.
IT IS FURTHER ORDERED that, pursuant to Sections 8A of the Securities Act, 21C of the Exchange Act, 9(e) of the Investment Company Act, and 203(j) of the Advisers Act:
RICKY A. LANG and ZION CAPITAL MANAGEMENT LLC jointly and severally DISGORGE $211,827 plus prejudgment interest at the rate established under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), compounded quarterly, pursuant to 17 C.F.R. § 201.600. Pursuant to 17 C.F.R. § 201.600, prejudgment interest is due from January 1, 1999, through the last day of the month preceding which payment is made.
IT IS FURTHER ORDERED that, pursuant to Sections 21B of the Exchange Act, 9(d) of the Investment Company Act, and 203(i) of the Advisers Act:
RICKY A. LANG and ZION CAPITAL MANAGEMENT LLC, jointly and severally, PAY A CIVIL MONETARY PENALTY of $220,000.
IT IS FURTHER ORDERED that, pursuant to Sections 9(b) of the Investment Company Act and 203(f) of the Advisers Act:
RICKY A. LANG IS BARRED from association with any investment adviser or investment company.
Payment of the disgorgement and penalty shall be made on the first day following the day this initial decision becomes final by certified check, U.S. Postal money order, bank cashier's check or bank money order payable to the Securities and Exchange Commission. The check and a cover letter identifying the Respondent[s] and Administrative Proceeding No. 3-10659, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission's Division of Enforcement at the above address.
This Initial Decision shall become effective in accordance with and subject to the provisions of 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this Initial Decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to 17 C.F.R. § 201.360(d)(1) within twenty-one days after service of the Initial Decision upon him, unless the Commission, pursuant to 17 C.F.R. § 201.360(b)(1), determines on its own initiative to review this Initial Decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the Initial Decision shall not become final as to that party.
Carol Fox Foelak
Administrative Law Judge
|1||Citations to the transcript, will be noted as "Tr. __." The Division's exhibits are numbered 1 through 44, and Respondents' are numbered 102 through 108. Citations to exhibits will be noted as "Ex. __."|
|2||Dambro left the partnership in 1998. Tr. 278-80.|
|3||The monthly payout to Lang was subject to a "high water mark." For example, if Lang were compensated for $10,000 in profits in April, and lost $10,000 in May, he would not be paid again until he recouped the losses. Tr. 282. Lang did not have a written agreement with Jayhead on how the profits and losses would be calculated. Tr. 276, 466.|
|4||Jayhead was dissolved on March 31, 2000. Tr. 275, 289. It had about $600,000 in assets then, but Lang did not receive any portion of that. Tr. 178, 290.|
|5||The customer of a prime brokerage account may trade through several broker-dealers but receives clearing, settlement, confirmations, and consolidated account statements from the prime broker. Tr. 18.|
|6||At the hearing Lang objected to referring to the sub-account as DAM's, insisting that it was Jayhead's. Tr. 241-42, 245, 276, 308, 399-400, 403, 426, 452; Ex. 15. However, the marketing materials and Offering Circular for Dominion did not disclose such a relationship to Jayhead; those documents referred to "Dominion Asset Management" as a "hedge fund" or "investment company." Ex. 6 at 7-8, Ex. 7 at 7-8, Ex. 8 at App. I, Sched. F at 2.|
|7||Tighe knew Dominion was a high-risk investment. Tr. 154. Westman and Anderson, however, had limited experience and understanding of investing, and Westman was not even an "accredited investor," as required by the Offering Circular and Securities Act Rule 501 and Regulation D. Tr. 159-62, 167-68, 178, 190; Ex. 8 at 14.|
|8||The investors lost most of their investments. Anderson recalled receiving less than $250,000 after Dominion was dissolved. Tr. 188. Tighe and Westman recalled receiving securities worth a few thousand dollars. Tr. 152, 173.|
|9||"Market Wise" is used in this proceeding to refer to Market Wise and to its predecessor Tiger Investment Group (Tiger). Individuals from Tiger formed Market Wise. Tr. 32. Prior to August 1998 Lang executed trades through Tiger; thereafter, through Market Wise. Tr. 32; Exs. 20, 21, 24, 25, 28, 29.|
|10||Hicks called Lang frequently during 1998 to ask how Dominion was doing. Tr. 334. There is no evidence in the record concerning what Lang told Hicks about Dominion's performance. Hicks and McGuane gave Tighe optimistic reports, through August 1998, that Dominion was up 30%. Tr. 145-48. In late 1998 Tighe telephoned Lang, who told him the fund was down 28%. Tr. 148-49. Westman received optimistic reports from Hicks at first, and then learned that Dominion had losses; however, most of the information he received about Dominion came second-hand, via Tighe and Anderson. Tr. 164-65, 169-70. Hicks gave Anderson optimistic reports, that Dominion was up about 30%, during the spring and summer, and then reports of losses at the end of 1998. Tr. 185-87. Not only is there no evidence as to what Lang told Hicks, but Hicks and McGuane had a motive to tell their customers that Dominion was doing well since they had recommended it to them. Thus, the evidence does not support a finding that Lang told Hicks to tell the investors that Dominion was doing well.|
|11|| The starting value for DAM was based on its value as of March 1, 1998, as shown on its Smith Barney account statement. The $220,241 value was accepted by both the Division and |
Respondents as DAM's starting value (although DAM's value as of April 1 was lower). The starting value for Dominion was based on the amount invested.
|12||For example, Smith Barney account statements show that, on July 2, 1998, DAM bought 5,000 shares of CDNOW, Inc. at $21.75, and Dominion bought 3,000 shares at $22; on July 6, DAM sold 5,000 shares at $24.63, and Dominion sold 3,000 shares at $23.875. Tr. 370-72; Ex. 22 at 3, Ex. 23 at 4. The record contains many similar examples of trades by DAM and by Dominion in the same security on the same day in which DAM had more favorable terms. Tr. 370-74, 376-84; Exs. 1-5, 41-44.|
|13||At the end of 1998, he was carrying more than 20% of Dominion's capital overnight. Tr. 362.|
|14||SOES was developed to provide small investors with a fast, efficient, and cost-effective means of executing small orders in Nasdaq securities. The rule change to which Lang refers is the Commission's July 1998 approval of the National Association of Securities Dealers, Inc. (NASD) "Actual Size Rule," which eliminated a requirement, unique to Nasdaq, that quotations in Nasdaq securities be displayed in a minimum size of 1,000 shares. The Actual Size Rule, consistent with the requirements of stock exchanges, requires only the display of actual size of at least 100 shares. See Order Approving a Proposed Rule Change to Permanently Expand the NASD's Rule Permitting Market Makers to Display Their Actual Quotation Size, 67 SEC Docket 1618, 63 Fed. Reg. 39322 (July 22, 1998). Day traders opposed the Actual Size Rule, which limits their ability to effect SOES executions large enough to maximize day trading strategies. Id. 67 SEC Docket at 1627, 63 Fed. Reg. at 39331.|
|15||The Form ADV and Offering Circular represented that Lang was employed at Malone until November 1991 and that he was associated with Rockmont Value Investors as a trader from January to June 1996. In fact, Lang left Malone in September 1990 and was unemployed for about a year. He was never employed as a trader or otherwise by Rockmont.|
|16||Rule 204-2(a)(3) specifies: "A memorandum of each order given by the investment adviser for the purchase or sale of any security, of any instruction received by the investment adviser concerning the purchase, sale, receipt or delivery of a particular security, and of any modification or cancellation of any such order or instruction. Such memoranda shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed such order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed where appropriate. Orders entered pursuant to the exercise of discretionary power shall be so designated."|
|17||Rule 204-2(a)(7) specifies: "Originals of all written communications received and copies of all written communications sent by such investment adviser relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given, (ii) any receipt, disbursement or delivery of funds or securities, or (iii) the placing or execution of any order to purchase or sell any security."|
|18||Rule 204-2(e)(1) specifies: "All books and records required to be made under [Rules 204-2(a)(3), (7)] shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment adviser."|
|19||The Division also requests that Zion's registration as an investment adviser be revoked. However, Zion is no longer registered with the Commission as an investment adviser.|
|20||See Sections 203(f) and 203(i) of the Advisers Act.|
|21||This figure is essentially the total of Dominion's losses and Lang's and DAM's profits.|
|22||Respondents will be held jointly and severally liable for the disgorgement because Zion was Lang's alter ego in the violative activities. See Daniel R. Lehl, 77 SEC Docket 2153, 2177-78 & n. 65 (May 17, 2002) (citing First Pac. Bancorp, 142 F. 3d at 1191; First Jersey Sec., Inc., 101 F. 3d at 1475; Hateley, 8 F.3d at 656).|
|23||See 17 C.F.R. § 201.1001.|
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