U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

UNITED STATES DISTRICT COURT
DISTRICT OF RHODE ISLAND


SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v.

SLOCUM, GORDON & CO.,
JOHN J. SLOCUM, JR. and
JEFFREY L. GORDON,

Defendants.


:
:
:
:
:
:

Case No.

COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF

Plaintiff Securities and Exchange Commission ("Commission") alleges the following against defendants Slocum, Gordon & Co. ("SGC"), John J. Slocum, Jr. ("Slocum"), and Jeffrey L. Gordon ("Gordon"):

PRELIMINARY STATEMENT

1. This enforcement action concerns a scheme by SGC, a registered investment adviser based in Newport, Rhode Island, and two of its principals, Slocum and Gordon, to illegally divert more than $1 million in short-term trading profits from the firm's clients to SGC. Beginning as early as 1988 and continuing through mid-2000, Slocum and Gordon used accounts that improperly mixed their clients' assets with SGC's own assets. The improper mixing of assets enabled Slocum and Gordon to engage in a practice known as "cherry picking" -allocating profitable stocks to themselves and unprofitable stocks to their clients. Specifically,Slocum and Gordon often purchased stocks without identifying whether they were bought for the firm or for clients. They then waited to assign the purchases until just before the settlement date (usually three business days after the purchase), so that they could first determine whether they could make money for SGC. In many instances when the stock price had risen before the settlement date, Slocum and Gordon sold stocks that had originally been intended for clients and credited the profits to SGC. In some instances when the price had fallen before the settlement date, they even assigned stocks originally intended for SGC to clients instead. As a result of these practices, Slocum and Gordon enjoyed extraordinary success in their trading for SGC. For example, Slocum and Gordon realized a profit on virtually all of their trades for SGC from 1996 until 2000, enabling them to generate more than $1 million in profits for SGC. As principals of SGC, Slocum and Gordon personally benefitted from the scheme.

2. Defendants' practice of appropriating short-term trading profits for SGC instead of clients and assigning non-profitable trades to clients instead of SGC constituted a breach of their fiduciary duty to the clients, because their investment decisions for the clients were tainted by a desire to generate trading profits for SGC. Further, defendants failed to disclose to SGC's clients either the improper mixing of firm and client assets or the practice of "cherry-picking" trades to generate short-term profits for SGC.

3. Through the activities alleged in this Complaint: (i) SGC, Slocum and Gordon engaged in fraud in the offer or sale of securities, in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act"), and fraudulent or deceptive conduct in connection with the purchase or sale of securities, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; (ii) SGC engaged in fraudulent or deceptiveconduct with respect to investment advisory clients, in violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"), and fraudulent or deceptive conduct by a registered investment adviser, in violation of Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(2) thereunder; (iii) SGC breached its record-keeping requirements under Section 204 of the Advisers Act and Rule 204-2(a)(3) thereunder; and (iv) SGC and Gordon made material misrepresentations and omissions in filings with the Commission, in violation of Section 207 of the Advisers Act. In addition, Slocum and Gordon aided and abetted SGC's violations of Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rule 204-2(a)(3) and its failure to comply with Rule 206(4)-2(a)(2), while Slocum also aided and abetted SGC's violation of Section 207 of the Advisers Act.

4. Accordingly, the Commission seeks: (i) entry of a permanent injunction prohibiting defendants from further violations of the relevant provisions of the federal securities laws; (ii) disgorgement of defendants' ill-gotten gains, plus pre-judgment interest; and (iii) the imposition of civil monetary penalties due to the egregious nature of defendants' violations.

JURISDICTION

5. The Commission seeks a permanent injunction and disgorgement pursuant to Section 20(b) of the Securities Act [15 U.S.C. §77t(b)], Section 21(d)(1) of the Exchange Act [15 U.S.C. §78u(d)(1)], and Section 209(d) of the Advisers Act [15 U.S.C. §80b-9(d)]. The Commission seeks the imposition of civil monetary penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. §77t(d)], Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)], and Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)].

6. This Court has jurisdiction over this action pursuant to Sections 20(d) and 22(a) of the Securities Act [15 U.S.C. §§77t(d), 77v(a)], Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§78u(d), 78u(e), 78aa], and Sections 209(d) and 214 of the Advisers Act [15 U.S.C. §§80b-9(d), 80b-14]. Venue is proper in this District because defendants are located here and their wrongful conduct occurred here.

7. In connection with the conduct described in this Complaint, defendants directly or indirectly made use of the mails or the means or instruments of transportation or communication in interstate commerce.

DEFENDANTS

8. SGC is a Rhode Island limited liability partnership with its principal place of business in Newport, Rhode Island. Since 1978, SGC has been registered with the Commission as an investment adviser under Section 203 of the Advisers Act [15 U.S.C. §80b-3]. SGC currently has over 330 client accounts and over $120 million in assets under management.

9. Slocum, age 60, is a partner of SGC. At all relevant times, he had discretion to buy and sell stocks for the benefit of certain clients of SGC, and he shared with Gordon the responsibility for buying and selling stocks for the benefit of SGC itself. He resides in Newport, Rhode Island.

10. Gordon, age 51, is a partner of SGC. At all relevant times, he had discretion to buy and sell stocks for the benefit of certain clients of SGC, and he shared with Slocum the responsibility for buying and selling stocks for the benefit of SGC itself. He resides in Portsmouth, Rhode Island.

STATEMENT OF FACTS

SGC's Improper Mixing of Assets

11. From at least 1988 until mid-2000, SGC improperly mixed client assets and its own assets in several omnibus accounts, rather than maintaining separate firm accounts and client custodial accounts. Until at least May 2000, Slocum and Gordon used the omnibus accounts to buy and sell stocks on behalf of both SGC and its clients.

12. Due to the nature of the omnibus accounts, when Slocum and Gordon placed an order to buy a stock, they were not required to - and did not - provide the broker or the bank with any information or documentation identifying whether the purchase was for the firm or for one of its clients. Indeed, they frequently waited until the settlement date (usually three business days after the purchase date) to assign the purchase to the firm or to a client in SGC's internal bookkeeping system. Thus, SGC's customary practices provided no means for independent verification on the trade date of whether SGC was purchasing a particular stock for itself or for a client.

Defendants' Improper Assignment of
Profitable Short-Term Trades to SGC

13. SGC's improper mixing of client and firm funds in omnibus accounts used to purchase stocks, coupled with the lack of independent contemporaneous verification for the assignment of stock purchases to the firm or to its clients, provided Slocum and Gordon with the opportunity to improperly assign profitable short-term trades to SGC while dumping potentially unprofitable trades on the clients. The potential for improper assignment of stock purchases was enhanced by the fact that Slocum and Gordon bought the same kinds of stocks for both the firmand its clients. For example, during the 1996-2000 period, Slocum and Gordon purchased more than 100 different stocks for SGC, and they purchased more than 70% of the same stocks for SGC's clients. In fact, they purchased more than 50% of the same stocks for a client during the same calendar year.

14. On many occasions from at least 1988 until mid-2000, Slocum and Gordon waited to assign the purchase of a stock to SGC or to a client until after they determined whether it was possible to make a short-term profit on the trade because the price of the stock had risen. If a short-term profit were possible, they often sold the stock and assigned the purchase and sale to SGC, even though many of the stocks had originally been intended for a client. On many other occasions, they assigned the purchase of stocks that had fallen in value before the settlement date to clients, even though the stocks had originally been intended for SGC itself. 15. Slocum and Gordon began engaging in this scheme as early as 1988 and enjoyed extraordinary success in their trading for SGC. For example, during the period between 1996 and mid-2000, SGC recorded over 170 transactions for itself in which it purchased stocks and then sold them before the settlement date. SGC made a profit on nearly all of those trades - more than 97%. Between 1996 and 2000, SGC's total profit from its short-term trading scheme was more than $1 million. As principals of SGC, Slocum and Gordon personally benefitted from SGC's profits derived from the trading scheme.

15. Pursuant to Section 206 of the Advisers Act [15 U.S.C. §80b-6], defendants owed a fiduciary duty to SGC's advisory clients. Defendants' practice of assigning numerous stock purchases to SGC, rather than to a client, based on the ability to obtain a short-term profit constituted a breach of their fiduciary duty to the clients. Defendants could have assigned theprofitable trades to the clients, but instead they chose to divert those profits to SGC. Similarly, defendants assigned many other stock purchases to clients only after determining that the stock price had fallen, thereby sticking the clients with the short-term losers. Further, defendants failed to provide the clients with impartial investment advice, because Slocum and Gordon were motivated by the desire to generate trading profits for the firm, and for themselves as its principals.

Defendants' Improper Failure to
Disclose SGC's Conflict of Interest

16. Pursuant to Section 204 of the Advisers Act [15 U.S.C. §80b-4] and Rule 204-1(a) thereunder [17 C.F.R. §275.204-1(a)], each investment adviser registered with the Commission must file a Form ADV with the Commission and, pursuant to Rule 204-3(a) [17 C.F.R. §275.204-3(a)], must provide its advisory clients with a copy of Part II of its Form ADV.

17. SGC first filed a Form ADV with the Commission in November 1978, with Gordon signing on behalf of the firm, and SGC amended portions of the Form ADV on several occasions thereafter. SGC annually provided copies of Part II of its Form ADV to its clients.

18. Item 9 of Part II of Form ADV requires an investment adviser to disclose on Schedule F "what restrictions or internal procedures, or disclosures are used for conflicts of interest in" transactions in which it buys or sells for itself the same securities that it recommends to clients.

19. Schedule F of Part II to SGC's Form ADV disclosed that SGC would be engaging in short-term trading for its own account but did not disclose that SGC was using mixed accountsto purchase securities for both itself and its clients and did not disclose that SGC was frequently assigning profitable short-term trades to itself while assigning short-term losers to clients after-the-fact and, on numerous occasions, contrary to the original intent when the stocks had been purchased.

FIRST CLAIM FOR RELIEF

(Violation of Section 17(a) of the Securities Act by All Defendants)

20. The Commission repeats and incorporates by reference the allegations in paragraphs 1-19 of the Complaint as if set forth fully herein.

21. SGC, Slocum and Gordon, directly or indirectly, acting intentionally, knowingly or recklessly, in the offer or sale of securities by the use of the means or instrumentalities of transportation or communication in interstate commerce or by use of the mails: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions 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 (c) engaged in transactions, practices or courses of business which operated as a fraud or deceit upon purchasers of the securities.

22. As a result, SGC, Slocum and Gordon violated Section 17(a) of the Securities Act [15 U.S.C. §77q(a)].

23. The violations of Section 17(a) of the Securities Act by SGC, Slocum and Gordon involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements and resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 20(d) of the Securities Act [15 U.S.C.§77t(d)].

SECOND CLAIM FOR RELIEF

(Violation of Section 10(b) of the Exchange Act and Rule 10b-5 by All Defendants)

24. The Commission repeats and incorporates by reference the allegations in paragraphs 1-23 of the Complaint as if set forth fully herein.

25. SGC, Slocum and Gordon, directly or indirectly, acting intentionally, knowingly or recklessly, by use of the means or instrumentalities of interstate commerce or of the mails, in connection with the purchase or sale of securities: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material fact or omitted to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices or courses of business which operated as a fraud or deceit upon certain persons, including advisory clients of SGC.

26. As a result, SGC, Slocum and Gordon violated Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5].

27. The violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by SGC, Slocum and Gordon involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements and resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)].

THIRD CLAIM FOR RELIEF

(Violation of Sections 206(1) and 206(2) of the Advisers Act by SGC)

28. The Commission repeats and incorporates by reference the allegations in paragraphs 1-27 of the Complaint as if set forth fully herein.

29. SGC, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, acting intentionally, knowingly or recklessly: (a) employed devices, schemes or artifices to defraud any client; or (b) engaged in transactions, practices or courses of business which operated as a fraud or deceit upon any client.

30. As a result, SGC violated Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. §§80b-6(1), (2)].

31. SGC's violation of Sections 206(1) and 206(2) of the Advisers Act involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements and resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)].

FOURTH CLAIM FOR RELIEF

(Violation of Section 206(4) of the Advisers Act and
Failure to Comply with Rule 206(4)-2(a)(2) by SGC)

32. The Commission repeats and incorporates by reference the allegations in paragraphs 1-31 of the Complaint as if set forth fully herein.

33. SGC was a registered investment adviser that had custody or possession of funds or securities in which a client had a beneficial interest and that did an act or took an action, directly or indirectly, with respect to such funds or securities without depositing all such funds of such clients in one or more bank accounts which contained only clients' funds.

34. As a result, SGC violated Section 206(4) of the Advisers Act [15 U.S.C. §80b-6(4)] and failed to comply with Rule 206(4)-2(a)(2) thereunder [17 C.F.R. §275.206(4)-2(a)(2)].

35. SGC's violation of Section 206(4) of the Advisers Act and its failure to comply with Rule 206(4)-2(a)(2) involved fraud, deceit, or deliberate or reckless disregard of regulatoryrequirements and resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)].

FIFTH CLAIM FOR RELIEF

(Violation of Section 204 of the Advisers Act and Rule 204-2(a)(3) by SGC)

36. The Commission repeats and incorporates by reference the allegations in paragraphs 1-35 of the Complaint as if set forth fully herein.

37. SGC was a registered investment adviser that failed to make and keep true, accurate and current books and records including a memorandum of each order given by the adviser for the purchase or sale of any security that identified the person who placed the order, the account for which it was entered, and the date of entry.

38. As a result, SGC violated Section 204 of the Advisers Act [15 U.S.C. §80b-4] and Rule 204-2(a)(3) thereunder [17 C.F.R. §275.204-2(a)(3)].

39. SGC's violation of Section 204 of the Advisers Act and Rule 204-2(a)(3) involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements and resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)].

SIXTH CLAIM FOR RELIEF

(Violations of Section 207 of the Advisers Act by SGC and Gordon)

40. The Commission repeats and incorporates by reference the allegations in paragraphs 1-39 of the Complaint as if set forth fully herein.

41. During the relevant period, the Forms ADV filed by SGC and signed by Gordon failed to disclose the conflict of interest arising from SGC's practice of using commingledaccounts to engage in short-term trading and its practice of allocating trades to itself or to clients after-the-fact based upon the potential for short-term profits.

42. As a result, SGC and Gordon violated Section 207 of the Advisers Act [15 U.S.C. §80b-7].

43. The violation of Section 207 of the Advisers Act by SGC and Gordon involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements and resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)].

SEVENTH CLAIM FOR RELIEF

(Aiding and Abetting SGC's Violations of Sections 204, 206(1), 206(2) and 206(4)
of the Advisers Act and Rules 204-2(a)(3) and 206(4)-2(a)(2) by Slocum and Gordon)

44. The Commission repeats and incorporates by reference the allegations in paragraphs 1-43 of the Complaint as if set forth fully herein.

45. As set forth above, SGC violated Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(3) and 206(4)-2(a)(2) thereunder.

46. Slocum and Gordon provided knowing and substantial assistance to SGC's violations of Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rule 204-2(a)(3) and SGC's failure to comply with Rule 206(4)-2(a)(2). Such assistance included, but was not limited to, causing SGC to commingle client assets and its own proprietary assets in omnibus custodial accounts, causing SGC to use those accounts to purchase stocks for both the firm and its clients, monitoring the price of the stocks before the settlement date, and, on numerous occasions, allocating certain stock purchases to the firm only after determining that the stocks could be sold for a short-term profit while allocating other stock purchases to clients only afterdetermining that the stocks had declined in value. Slocum and Gordon knew or were reckless in not knowing that SGC's handling of these transactions was improper and that SGC was failing to disclose its conflict of interest to its clients.

47. As a result, Slocum and Gordon aided and abetted SGC's violations of Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rule 204-2(a)(3) and its failure to comply with Rule 206(4)-2(a)(2).

EIGHTH CLAIM FOR RELIEF

(Aiding and Abetting SGC's Violations of
Section 207 of the Advisers Act by Slocum)

48. The Commission repeats and incorporates by reference the allegations in paragraphs 1-47 of the Complaint as if set forth fully herein.

49. As set forth above, SGC violated Section 207 of the Advisers Act.

50. Slocum provided knowing and substantial assistance to SGC's violation of Section 207 of the Advisers Act. Such assistance included, but was not limited to, causing SGC to commingle client assets and its own proprietary assets in omnibus custodial accounts, causing SGC to use those accounts to purchase stocks for both the firm and its clients, monitoring the price of the stocks before the settlement date, and, on numerous occasions, allocating certain stock purchases to the firm only after determining that the stocks could be sold for a short-term profit while allocating other stock purchases to clients only after determining that the stocks had declined in value. Slocum knew or was reckless in not knowing that SGC was failing to disclose its conflict of interest to its Forms ADV.

51. As a result, Slocum aided and abetted SGC's violation of Section 207 of the Advisers Act.

PRAYER FOR RELIEF

WHEREFORE, the Commission requests that this Court:

A. Enter a permanent injunction restraining SGC, Slocum and Gordon and each of their agents, servants, employees and attorneys and those persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, including facsimile transmission or overnight delivery service, from directly or indirectly engaging in violations of:

  1. Section 17(a) of the Securities Act [15 U.S.C. §77q(a)];

  2. Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5];

  3. Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. §§80b-6(1), (2)];

  4. Section 206(4) of the Advisers Act [15 U.S.C. §80b-6(4)] and Rule 206(4)-2(a)(2) thereunder [17 C.F.R. §275-206(4)-2(a)(2)];

  5. Section 204 of the Advisers Act [15 U.S.C. §80b-4] and Rule 204-2(a)(3) thereunder [17 C.F.R. §275.204-2(a)(3)]; and

  6. Section 207 of the Advisers Act [15 U.S.C. §80b-7];

B. Require SGC, Slocum and Gordon to disgorge their ill-gotten gains and losses avoided, plus pre-judgment interest;

C. Order SGC, Slocum and Gordon to pay appropriate civil monetary penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. §77t(d)], Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)], and Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)].

D. Retain jurisdiction over this action to implement and carry out the terms of all orders and decrees that may be entered; and

E. Grant such other and further relief as the Court deems just and proper.

Respectfully submitted,

____________________________
Juan Marcel Marcelino
District Administrator

Frank C. Huntington (Mass. Bar No. 544045)
Senior Trial Counsel

Steven Y. Quintero (Mass. Bar No. 632079)
Senior Enforcement Attorney

Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
73 Tremont Street, Suite 600
Boston, MA 02108
(617) 424-5900 ext. 201 (Huntington)
ext. 208 (Quintero)
(617) 424-5940 fax

Dated: August 20, 2002


http://www.sec.gov/litigation/complaints/comp17688.htm

Modified: 08/20/2002