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UNITED STATES DISTRICT COURT
Civil Action No.: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. ROCKY MOUNTAIN SECURITIES AND
and JUDITH L. CLARKE, Defendants. COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF 1. Plaintiff, the Securities and Exchange Commission ("Commission" or the "Plaintiff"), alleges the following for its complaint: Summary 2. This matter involves violations of the Commission's net capital, customer protection, and books and records rules by defendants Rocky Mountain Securities and Investments, Inc. ("Rocky Mountain Securities") and Judith L. Clarke ("Clarke"). Further, it alleges violations of the antifraud provisions of the federal securities laws by Clarke. 3. Rocky Mountain Securities is a securities broker-dealer with offices located in Denver, Colorado. Clarke was a securities trader at the firm. 4. From at least July 2002 to January 24, 2003, defendant Clarke engaged in a fraudulent scheme to cover up losses she incurred in the proprietary or "house" account she traded for Rocky Mountain Securities' benefit. She misappropriated at least $4.5 million of customers' funds to pay for the losses. In part because of the disarray of Rocky Mountain Securities' books and records, the firm only recently discovered Clarke's scheme. 5. Rocky Mountain Securities operated in violation of the net capital rule from at least December 31, 2002 through February 3, 2003. The net capital rule essentially requires broker-dealers to maintain a certain amount of liquid assets or to cease operations. Rocky Mountain Securities currently has negative net capital. The firm continued to transact business until at least February 3, 2003. 6. The firm's books and records filed with the Commission were inaccurate during the relevant period. 7. The Commission brings this action to enjoin defendants Rocky Mountain Securities and Clarke from violations of the federal securities laws, and for other relief. 8. By virtue of its conduct, Rocky Mountain Securities has engaged and, unless enjoined, will continue to engage, in violations of Section 15(c)(3) of the Exchange Act [15 U.S.C. 78o(c)(3)] and Rules 15c3-1 and 15c3-3 [17 C.F.R. 240.15c3-1 and 240.15c3-3], promulgated thereunder and Section 17(a) of the Exchange Act [15 U.S.C. 78q(a)] and Rule 17a-3 promulgated thereunder. 9. By virtue of her conduct, defendant Clarke has engaged and, unless enjoined, will continue to engage, in violations 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] thereunder. 10. By virtue of her conduct, defendant Clarke also has aided and abetted Rocky Mountain Securities' violations of Section 15(c)(3) of the Exchange Act and Rules 15c3-1 and 15c3-3, thereunder and Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. JURISDICTION AND VENUE 11. The Commission brings this action pursuant to Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. 78u(d)-(e)] to enjoin the Defendants from engaging in the transactions, acts, practices and courses of business alleged in this Complaint, and transactions, acts, practices and courses of business of similar purport and object, and other relief. 12. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. 78u(d), 78u(e) and 78aa]. 13. The Defendants, directly and indirectly, have made use of the mails, the means and instrumentalities of transportation and communication in interstate commerce, and the means and instruments of interstate commerce, in connection with the transactions, acts, practices, and courses of business alleged in this Complaint. 14. Venue lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. 78aa], because certain of the transactions, acts, practices and courses of business constituting violations of the Securities Act and Exchange Act have occurred within the District of Colorado and the defendants reside or have offices in Colorado. THE DEFENDANTS 15. Rocky Mountain Securities and Investments, Inc. is a broker-dealer headquartered in Denver and at all relevant times has been registered with the Commission as a broker-dealer pursuant to the provisions of Section 15(b) of the Exchange Act [15 U.S.C. 78o(b)]. 16. Judith L. Clarke, of Littleton, Colorado, was an associated person of RMSI from 1980 until January 24, 2003, when she was terminated by the firm. FACTUAL ALLEGATIONS 17. Rocky Mountain Securities is a registered broker and dealer and a member of the National Association of Securities Dealers, Inc. ("NASD"). Pursuant to its membership agreement with the NASD and because of the nature of its business, Rocky Mountain Securities is required to maintain net capital of at least $250,000 at all times. 18. Judith L. Clarke was employed by Rocky Mountain Securities as a trader in securities from at least 1999 until January 24, 2003, when the firm terminated her. Clarke also was a registered representative servicing customer accounts. 19. From at least July 2002 until she left the firm, Clarke caused the firm to incur losses when she traded on behalf of it. 20. In an apparent attempt to conceal these losses, Clarke prepared fictitious entries in the firm's books and records which falsely depicted her trades as profitable. 21. In order to satisfy the firm's trading losses and to hide those trading losses, she caused the firm to pay at least $4.5 million from a money market account that held customer funds to satisfy the firm's trading losses. 22. These misappropriated customer funds are a liability of the firm for purposes of both the net capital and customer reserve and protection rules. 23. This liability has not been reflected on the firm's books and records as required by the Commission rules. 24. Further, by creating fictitious entries in the firm's books and records, Clarke caused the firm to be in violation of the Commission 's books and records rules. 25. Rocky Mountain Securities conducted a securities business while not in compliance with the Commission 's net capital rule from at least December 31, 2002, until February 3, 2003. 26. Rocky Mountain Securities' net capital deficiency was at least $3.6 million as of December 31, 2002. 27. As of February 3, 2003, the firm's unrecorded liability to customers totals over $4.5 million. 28. Also, because of the unrecorded liability, the firm has been in violation of the Commission's customer reserve account and protection rule from at least December 31, 2002 until February 3, 2003. 29. During the period from July 2002 through February 4, 2003, Rocky Mountain Securities effected customer transactions while failing to maintain net capital of at least $250,000. First Claim for Relief Net Capital Violations and Customer Protection Violations;
30. Paragraphs 1 through 29 are realleged and incorporated herein by reference. 31. During the period from at least July 2002 to February 3, 2003, defendant Rocky Mountain Securities, aided and abetted by defendant Clarke, has made use of the mails and the means and instrumentalities of interstate commerce to effect transactions in and to induce the purchase and sale of securities when its net capital as computed in the manner required by Rule 15c3-1 was less than the required amount of $250,000 and when it owed a substantial liability to customers. 32. By reason of the foregoing, Rocky Mountain Securities, aided and abetted by Clarke, violated Section 15(c)(3) of the Exchange Act and Rules 15c3-1 and 15c3-3 thereunder. Second Claim for Relief Books and Records Violations; Violations of Section 17(a)
33. Paragraphs 1 through 29 are realleged and incorporated herein by reference. 34. From at least July 2002 to February 3, 2003, Defendant Rocky Mountain Securities, while operating as a broker-dealer, has failed to create and maintain current, accurate books and records. 35. By reason of the foregoing, Defendant Rocky Mountain Securities, aided and abetted by defendant Clarke, has violated and, unless enjoined, will continue to violate Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. Third Claim For Relief Fraud by Clarke; Violations of Section 10(b) of the
36. Paragraphs 1 through 29 are hereby realleged and are incorporated herein by reference. 37. From at least July 2002 to February 3, 2003, Defendant Clarke, in connection with the purchase and sale of securities described herein, by the use of the means and instrumentalities of interstate commerce and by use of the mails, directly and indirectly: a) employed devices, schemes, and artifices to defraud; b) made untrue statements of material facts and 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 c) engaged in acts, practices, and courses of business which would and did operate as a fraud and deceit upon the purchasers of such securities, all as more particularly described above. 38. Defendant Clarke, with scienter, engaged in the aforementioned devices, schemes and artifices to defraud, made untrue statements of material facts and omitted to state material facts, and engaged in fraudulent acts, practices and courses of business. 39. By reason of the foregoing, Clarke, directly and indirectly, has violated and, unless enjoined, will continue to violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. RELIEF REQUESTED WHEREFORE, Plaintiff Commission respectfully requests that the Court: I. Find that the Defendants, and each of them, committed the violations alleged. II. Enter a temporary restraining order, preliminary and permanent injunctions enjoining Defendants Rocky Mountain Securities and Clarke, their officers, agents, servants, employees, and attorneys, and those persons in active concert or participation with them who receive actual notice of the order of injunction, by personal service or otherwise, and each of them, whether as principals or as aiders and abettors, from violating, directly or indirectly, from violating Section 15(c)(3) of the Exchange Act and Rules 15c3-1 and 15c3-3 thereunder and Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. III. Appoint a trustee, jointly on the motion of the Securities Investor Protection Corporation ("SIPC"), for the liquidation of the business of Defendant Rocky Mountain Securities, and freeze Rocky Mountain Securities assets, except for the purpose of effecting possession and control of those assets by the SIPC trustee. IV. Enter a temporary restraining order, preliminary and permanent injunctions enjoining the defendant Clarke, her agents, servants, employees, and attorneys, and those persons in active concert or participation with her who receive actual notice of the order of injunction, by personal service or otherwise, and each of them, from violating, directly or indirectly, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. V. Enter an order freezing the assets of defendant Clarke, requiring an accounting, and preserving documents, in order to preserve the status quo. VI. Enter an order requiring Clarke to disgorge and pay over, as the Court may direct, all ill-gotten gains received or benefits in any form derived from the illegal conduct alleged in this Complaint, together with pre-judgment and post-judgment interest as provided by law. VII. Enter an order requiring Clarke to pay civil money penalties pursuant to Section 21(d)(3) of the Exchange Act. VIII. Such other and further relief as this Court may deem just, equitable, and appropriate in connection with the enforcement of the federal securities laws and for the protection of investors. Dated: February 24, 2003
http://www.sec.gov/litigation/complaints/comp17976.htm
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