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UNITED STATES DISTRICT COURT
COMPLAINT The Securities and Exchange Commission (Commission) alleges: 1. This case concerns a fraudulent scheme from 1995 to May 1999 involving two registered representatives, Peter J. Burns (Burns) and Michael F. Hollendoner (Hollendoner), who made secret cash payments to Miriam Santos, then-City Treasurer of the City of Chicago, to obtain a share of the City's lucrative securities investments. Burns and Hollendoner paid thousands of dollars to Santos, who cut off other brokers who refused to make campaign contributions she solicited, in order to receive securities business they would otherwise have lost. As a result, they received thousands of dollars in compensation from City business they otherwise would not have earned. Santos used part of the cash she collected from Burns and Hollendoner to purchase office furniture for the campaign office she used in her run for Illinois Attorney General. 2. Santos, Burns and Hollendoner thereby violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) [15 U.S.C. §§78j(b)] and Rule 10b-5 [17 C.F.R. §240.10b-5] promulgated thereunder. 3. Unless enjoined by this Court, each defendant will likely continue to engage in such violative conduct. Pursuant to Sections 21(d)(1) and 21(e) of the Exchange Act [15 U.S.C. §§78u(d)(1) and 78u(e)], the Commission seeks injunctions against each of the defendants enjoining them from future violations. The Commission also seeks disgorgement and civil penalties, as described in its prayer for relief, from Santos, Burns and Hollendoner. JURISDICTION AND VENUE 4. The Court has jurisdiction over this action pursuant to Sections 21(d) and 27 of the Exchange Act [15 U.S.C. §§78u(d) and 78aa] and 28 U.S.C. §1331. Venue is proper under Section 27 of the Exchange Act [15 U.S.C. §78aa]. 5. Santos, Burns and Hollendoner reside in the Northern District of Illinois. The acts and practices constituting the violations alleged herein occurred within the jurisdiction of the United States District Court for the Northern District of Illinois and elsewhere. 6. Santos, Burns and Hollendoner, directly and indirectly, have made use of the means and instrumentalities of interstate commerce and of the mails in connection with the acts and practices alleged herein in the Northern District of Illinois and elsewhere. DEFENDANTS 7. Defendant Santos is 45 years of age and resides in Chicago, Illinois. At all relevant times, Santos was Treasurer (City Treasurer) of the City of Chicago (City). On or about October 27, 2000, Santos pled guilty to mail fraud [18 U.S.C. §1341] and was automatically stripped of her duties as City Treasurer. In her plea agreement, Santos admitted that she engaged in a scheme to defraud the City, the City Treasurer's Office and the citizens of the City, and to obtain money and property by means of false and fraudulent misrepresentations and omissions of material facts involving the abuse of her elected position. On or about November 21, 2000, Santos was sentenced to approximately four months incarceration, fined $1,000 and ordered to pay restitution of $20,000. On or about April 5, 2001, Santos consented to a two-year suspension of her Illinois law license. 8. Defendant Burns is 48 years of age and lives in Wilmette, Illinois. At all times relevant, Burns was a registered representative associated with a broker-dealer registered with the Commission. 9. Defendant Hollendoner is 58 years of age and resides in Chicago, Illinois. At all times relevant, Hollendoner was a registered representative associated with broker-dealers registered with the Commission. FACTS 11. Miriam Santos was appointed City Treasurer in or about 1989. She was elected to that position in 1991 and reelected in 1995. She ran for Illinois Attorney General in 1998, but was defeated. In 1999, she was reelected City Treasurer. 12. As City Treasurer, Santos was responsible for overseeing the investment, through the purchase and sale of securities, of approximately two and one-half billion dollars in City funds. 13. Investments by the City Treasurer's Office were supposed to be allocated pursuant to a competitive bidding process. The process was designed to prevent favoritism and maximize the City's income from permissible investments. 14. Prior to engaging in investment business with the City, broker-dealers had to be authorized and approved by the City Treasurer's Office. In conjunction with the normal approval process, in or about May of each year, broker-dealers interested in doing business with the City were required to complete and return to the City Requests for Proposals (RFPs). The City Treasurer's Office, in turn, reviewed the RFPs and investigated the firms. After the review, broker-dealers were either approved or denied, with the approved firms thereafter permitted to do business with the City the following year. 15. After being approved to do business with the City, broker-dealers were permitted to solicit the City for business. Each working day, registered representatives associated with approved broker-dealers contacted the City Treasurer's Office to inquire about the funds the City Treasurer's Office needed to invest. The registered representatives then provided to the City Treasurer's Office their investment rates and returns for the desired investments. Generally, the City Treasurer's Office invested and utilized the best rate offered that day by the brokerage firms to invest the City's funds and to maximize the interest earned by those investments. 16. From 1995 to 1999, approximately 25 broker-dealers were approved to do business with the City Treasurer's Office. However, in practice, fewer than ten brokers handled most of the lucrative securities investments allocated by the City Treasurer's Office. 17. At all relevant times, Burns and Hollendoner were registered representatives associated with broker-dealers approved to do investment business with the City Treasurer's Office. In that capacity, Burns and Hollendoner handled the purchase and sale of securities through brokerage accounts held by City at their respective firms. Burns and Hollendoner were, and had been for several years, among the City's top brokers. As such, each earned substantial compensation from City investment business allocated to them. Santos knew these facts. 18. From 1995 to 1999, Santos, Burns and Hollendoner employed devices, schemes and artifices to defraud the City in connection with allocation of the City's investment business to registered representatives associated with broker-dealers approved to do business with the City. 19. In connection with the scheme, Santos, directly or indirectly, allocated investments of City funds based on her personal, political and financial interests and thereby circumvented the normal competitive process by which the City allocated its investment business. 20. Beginning in or about 1995, indirectly or directly, Santos told Burns and Hollendoner that, if they wished to remain among the City's top brokers, they were required to raise specified campaign contributions for her. Santos also, indirectly or directly, told Burns and Hollendoner that she expected them to personally make up any shortfall in the amounts they raised. 21. As a result, from in or about 1995 through in or about 1998, directly or indirectly, Burns and Hollendoner secretly gave Santos thousands of dollars in cash. Burns and Hollendoner forwarded the cash to Santos through her first deputy. Santos used the funds provided by Burns and Hollendoner for her own personal, political and financial benefit. 22. In or about March 1998, Burns and Hollendoner paid approximately $7,500 for office furniture for Santos' campaign headquarters. Specifically, in or about March 1998, Santos ordered her first deputy to accompany her to a Chicago furniture store. Upon arrival, Santos tagged certain furniture pieces she wanted for her "Santos for Attorney General" campaign headquarters. The cost of the furniture was approximately $7,500. Shortly thereafter, Santos ordered her first deputy to contact Burns and Hollendoner and tell them that there was some office furniture Santos wanted for her "Santos for Attorney General" campaign headquarters and that she expected them to pay for it. Pursuant to Santos' instructions, her first deputy contacted Burns and Hollendoner and told them that Santos expected them to pay for the above office furniture. Hollendoner responded by asking Santos' first deputy the cost of the furniture and the first deputy told him $7,500. Hollendoner replied, "Santos has expensive tastes," and told Santos' first deputy he could pay part of the cost of the furniture. Santos' first deputy had a similar conversation with Burns in which Burns agreed to pay the remainder of the cost of the furniture. Burns and Hollendoner provided Santos with cash totaling approximately $7,500 to pay for the office furniture. Santos' first deputy took the cash from Burns and Hollendoner to the furniture store and used it to purchase the office furniture Santos had tagged. Santos thereafter ordered her first deputy to issue a check to the furniture store for the amount of the purchase price of the furniture and falsify her campaign expense records to create the impression this check was used to pay for the office furniture. 23. Subsequently to in or about May 1999, in connection with and as a result of their secret payments to Santos of thousands of dollars in cash, Burns and Hollendoner were allocated securities transactions by the City Treasurer's Office that they otherwise would not have received. Burns and Hollendoner earned thousands of dollars in compensation from that investment business. 24. In or about June 1998, directly and indirectly, Santos pressured other broker-dealers approved to engage in investment business with the City to make campaign contributions to the Democratic Party of Illinois by making them fear that, if they did not contribute, their business relationship with the City might be adversely affected. 25. In or about June 1998, Santos ordered the City Treasurer's Office to cease doing business with seven approved broker-dealers after she learned that those firms had refused to make campaign contributions she requested. 26. From in or about July 1998 to in or about September 1998, at Santos' direction (Santos' cutoff order), the City Treasurer's Office did not engage in business with any of the broker-dealers that Santos ordered cut off. 27. As a result of Santos' cutoff order, on at least twenty occasions, the City was unable to make investments at the best rate provided by approved brokerage firms. As a result, the City lost $16,000 in interest income that could have been earned by the City had the City Treasurer's Office been able to invest with the firms that Santos ordered cut off. 28. By virtue of her position as City Treasurer, under Chicago Municipal Code sec. 2-156-020 and federal common law, Santos owed a fiduciary duty to the City in the performance of her public duties, including in connection with the approval of broker-dealers to transact securities business with the City Treasurer's Office and the allocation of securities investments by the City Treasurer's Office. Under Chicago Municipal Code § 2-156-040(a), Santos also had a duty not to accept, anything of value, including but not limited to, a gift or favor, based upon any mutual understanding, either explicit or implicit, that the votes, official actions, decisions or judgments of any official, employee or City contractors, concerning the business of the City, would be influenced thereby. 29. At all relevant times, under Chicago Municipal Code § 2-156-040(a), Burns and Hollendoner were prohibited from offering any official anything of value, including but not limited to, a gift or favor, based upon any mutual understanding, either explicit or implicit, that the votes, official actions, decisions or judgments of any official, employee or City contractors, concerning the business of the City, would be influenced thereby. 30. At all relevant times, Burns and Hollendoner were bound by the rules of the National Association of Securities Dealers and the policies of their respective firms. The rules and policies in effect during the relevant period forbade Burns and Hollendoner from giving gifts worth more than $100 per year to any customer, and required Burns and Hollendoner to report all such gifts to their firms. 31. At no time did Santos, Burns or Hollendoner disclose to the City that: Santos was secretly using her control over the City's investments to extract cash from Burns and Hollendoner; Burns and Hollendoner made payments to Santos; or Burns and Hollendoner made payments to Santos in order to retain a share of the City's investment business. 32. The information that Santos, Burns and Hollendoner failed to disclose regarding their fraudulent scheme was material. Santos' solicitation and acceptance of cash from Burns and Hollendoner corrupted the process by which broker-dealers were approved to do business with the City and the manner in which the City Treasurer's Office allocated the City's investments. In addition, these acts and practices gave rise to a conflict of interest on the part of Santos, since she was the City's fiduciary with respect to the securities transactions that Burns and Hollendoner handled for the City during the fraudulent scheme. These acts and practices also related to breaches by Santos, Burns and Hollendoner of their duties to the City in connection with the investment of City funds for which Santos was responsible as City Treasurer. 33. By virtue of the above acts and practices, Santos, Burns and Hollendoner breached the duties they owed the City and to their employers. COUNT I Against All Defendants, For Violations of Section 10(b) of the
34. Paragraphs 1 through 33 are realleged and incorporated by reference as if set forth fully herein. 35. From in or about 1995 through in or about May 1999, Santos, Burns and Hollendoner, in connection with the purchase and sale of securities, directly and indirectly, by the use of the means and instrumentalities of interstate commerce and of the mails, employed devices, schemes and artifices to defraud; omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in acts, practices and courses of business which operated as a fraud and deceit upon the City, as set forth above. 36. Santos, Burns and Hollendoner knew, or were reckless in not knowing of the activities described in paragraphs 34 and 35 above. 37. By reason of the activities described in paragraphs 34 through 36 above, Santos, Burns and Hollendoner violated Section 10(b) of the Securities Exchange Act, [15 U.S.C. §§78j(b)] and Rule 10b-5 [17 C.F.R. §240.10b-5] promulgated thereunder. PRAYER FOR RELIEF WHEREFORE, the Commission requests that the Court: I. Find that Defendants Santos, Burns, and Hollendoner committed the violations charged above. II. Issue an Order of Permanent Injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining Defendants Santos, Burns and Hollendoner and their respective officers, agents, servants, employees, attorneys and those persons in active concert or participation with them who receive actual notice of the Order, by personal service or otherwise, and each of them from, directly or indirectly, engaging in the acts and practices described above, or in conduct of similar purport and object, in violation of Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 [17 C.F.R. §240.10b-5] promulgated thereunder. III. Issue an Order requiring Defendants Santos, Burns, and Hollendoner to disgorge their ill-gotten gains, plus prejudgment interest. Specifically, Santos should disgorge all cash and improper gifts and gratuities she received, directly and indirectly, from Burns and Hollendoner, in connection with securities transactions handled by Burns and Hollendoner for the City, plus prejudgment interest. Burns and Hollendoner should disgorge all income they received from securities transactions they handled for the City when they were secretly paying cash, or any other improper gifts and gratuities, to Santos, plus prejudgment interest. IV. With regard to Defendants Santos', Burns' and Hollendoner's violative acts and practices set forth herein, issue an Order imposing appropriate civil penalties against each of them pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)]. V. Retain jurisdiction of this action in accordance with the principals of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court. VI. Grant Orders for such further relief as the Court may deem appropriate.
Dated: November 13, 2002 http://www.sec.gov/litigation/complaints/comp17839.htm
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