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UNITED STATES DISTRICT COURT
The United States Securities and Exchange Commission (Commission) alleges: PRELIMINARY STATEMENT 1. In 1998 and 1999, Defendants, David A. Zwick and Todd J. Cohen, principals of Suncoast Capital Group, Ltd., a registered broker-dealer, and Terrence J. O'Donnell, a trader at the firm, participated in a fraudulent scheme to kick back cash and gifts to Anthony Dong-Yin Shen, an employee at New York Life Insurance Company, in exchange for Shen's (A) directing order flow to Suncoast; and (B) purchase or sale of millions of dollars of securities at "off-market" prices not reasonably related to prevailing market prices, or at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. Pursuant to the scheme, Zwick, Cohen, and O'Donnell, among other things, executed or approved the unfairly priced trades. 2. Beginning in late January 1998, Shen directed approximately forty trades to Suncoast (the "New York Life trades"). Most were off-market or at prices more favorable to Suncoast than otherwise available. Because he was receiving cash kickbacks and gifts pursuant to the fraudulent scheme, Shen did not negotiate for the better prices available to his employer. 3. At all relevant times, Zwick was a Suncoast principal who supervised Deborah J. Breckenridge, the Suncoast registered representative who was Shen's contact at Suncoast. Breckenridge negotiated the exchange of trades for kickbacks with Shen. Zwick procured and/or approved gift kickbacks to Shen in violation of National Association of Securities Dealers, Inc. (NASD) rules and Suncoast firm policy; encouraged Breckenridge to pay cash kickbacks to Shen disguised as payments on losing bets; instructed Breckenridge on concealment of the kickbacks; and allowed the fraudulent New York Life trades to settle when he knew or was reckless in not knowing that they were directed to Breckenridge in exchange for kickbacks and gifts, and priced at off-market prices not reasonably related to prevailing market prices, or at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. 4. At all relevant times, Cohen was a Suncoast principal who supervised O'Donnell and another trader who together executed most of the New York Life trades. Cohen reviewed and approved most if not all of Breckenridge's fraudulent New York Life trades; encouraged Breckenridge to disguise kickbacks to Shen as payments on losing bets; helped Breckenridge change the price of a trade with Shen to conceal the scheme from New York Life; and allowed the fraudulent New York Life trades to settle when he knew or was reckless in not knowing that the trades were directed to Breckenridge in exchange for kickbacks and gifts, and priced at off-market prices not reasonably related to prevailing market prices, or at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. The other Suncoast trader supervised by Cohen executed or reviewed six off-market U.S. treasury trades with New York Life during the course of the illicit scheme. 5. At all relevant times, O'Donnell was a Suncoast trader. O'Donnell encouraged Breckenridge to pay cash kickbacks to Shen disguised as payments for losing bets; helped Breckenridge change the price of a trade with Shen to conceal the scheme; and executed and approved the majority of the New York Life trades when he knew or was reckless in not knowing that the trades were directed to Breckenridge in exchange for kickbacks and gifts, and priced at off-market prices not reasonably related to prevailing market prices, or at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. 6. Zwick, Cohen, and O'Donnell each violated Section 17(a) of the Securities Act of 1933 (Securities Act) [15 U.S.C. § 77q(a)], and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder; and each aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by Shen and Breckenridge. 7. Unless enjoined by this Court, it is likely that each Defendant will continue to engage in such violative conduct. Therefore, the Commission seeks this Court's injunction against future violation directed to each Defendant as well as disgorgement of unjust enrichment, prejudgment interest, and statutory civil penalties as described in its prayer for relief. JURISDICTION AND VENUE 8. The Court has jurisdiction over this action under Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa]. Venue lies in this district under Section 22(a) of the Securities Act and Section 27 of the Exchange Act because the Defendants participated in offers and sales of securities and transact and did transact business in this district. DEFENDANTS AND OTHER RELEVANT ENTITIES 9. Defendant David A. Zwick, a founder of Suncoast, lives in Fort Lauderdale, Florida. From 1993 through January 2000, Zwick was a principal, chief executive officer, executive vice president, and the compliance officer of Suncoast. Zwick shared in Suncoast's profits from the kickback scheme through partnership and/or ownership interests. 10. Defendant Todd J. Cohen, a founder of Suncoast, lives in Weston, Florida. From 1993 through January 2000, Cohen was a principal, president, and the trading desk supervisor of Suncoast. Cohen shared in Suncoast's profits from the kickback scheme through partnership and/or ownership interests. 11. Defendant Terrence J. O'Donnell lives in Loxahatchee, Florida. From August 1997 until January 2000, O'Donnell was an employee of Suncoast at its Fort Lauderdale, Florida, office, where he traded mortgage-backed securities, including so-called "TBA" or "to be announced" mortgage-backed securities. O'Donnell shared in Suncoast's profits from the kickback scheme through commissions and/or performance-related bonuses. 12. Suncoast Capital Group, Ltd. was a small regional broker-dealer firm registered with the Securities and Exchange Commission from 1993 to 2000 pursuant to Section 15(b) of the Exchange Act. Suncoast specialized in trading collateralized mortgage obligations, and also traded U.S. Treasury and TBA mortgage-backed securities. 13. New York Life Insurance Company, Inc. was, at all relevant times, a mutual insurance company based in New York which traded securities for its propriety accounts. 14. Anthony Dong-Yin Shen was, at all relevant times, an employee of New York Life Insurance Company whose duties included purchasing securities for New York Life's proprietary accounts. Shen has pleaded guilty to securities fraud for his role in this scheme and has been sentenced. 15. Deborah J. Breckenridge, at all relevant times, was a registered representative employed by Suncoast who negotiated trades with Shen in exchange for kickbacks and gifts. Breckenridge has pleaded guilty to securities fraud and been sentenced for her role in this scheme. STATEMENT OF FACTS Defendants Zwick, Cohen, and O'Donnell
16. Zwick, as Suncoast's chief executive officer and compliance officer, had responsibility to ensure that Suncoast's business practices complied with federal securities laws and regulation, and in particular that every Suncoast trade was executed at a fair price. Accordingly, Zwick reviewed the firm's trade blotters on a daily basis and approved the pricing and mark-up or mark-down of all trades the firm executed. Zwick also reviewed and approved firm entertainment expenses and gifts to clients, and supervised the Suncoast sales representatives. 17. Cohen, as Suncoast's president and supervisor of its trading desk, was also responsible for ensuring that every Suncoast trade was executed at a fair price. Accordingly, Cohen also reviewed the firm's trade blotters on a daily basis and approved the pricing and mark-up or mark-down of all trades the firm executed. Cohen reviewed and approved all trade tickets, which indicated for each trade the securities traded, price, mark-up or mark-down, and contra-party for each trade; and Cohen supervised the Suncoast traders. 18. O'Donnell, as Suncoast's trader of TBA securities, was responsible for ensuring that every Suncoast TBA trade was executed at a fair price. O'Donnell learned from other dealers the prevailing market price for the TBA securities Suncoast traded, conferred with Suncoast sales representatives and approved the prices they charged their clients for those securities, and executed the Suncoast TBA trades. O'Donnell's practice was to review and approve the trade tickets for every Suncoast trade, including the price of the trade. The Defendants Knew or Were Reckless in Not Knowing That the
19. Zwick, as a result of his experience and expertise in the pricing of fixed income securities, his knowledge of prevailing market prices at the time of the trades, and his review of the Suncoast trade blotters, knew or was reckless in not knowing that Breckenridge's trades with New York Life were priced at off-market prices that were not reasonably related to prevailing market prices, or at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. Despite this, Zwick approved those trades and allowed them to settle, and took no steps to ensure that prices on trades between Suncoast and New York Life were fair. 20. Zwick, as a Suncoast principal, had a duty to treat New York Life fairly as a customer and to inform New York Life of material information relevant to their trading relationship. Zwick was bound by the rules of the NASD and Suncoast policies, which, among other things, forbade unfair pricing on securities trades. Zwick failed to disclose to New York Life the material information that Suncoast's trades with New York Life were unfairly priced. 21. Cohen, as a result of his experience and expertise in the pricing of fixed income securities, his knowledge of prevailing market prices at the time of the trades, and his review of the Suncoast trade tickets and trade blotters, knew or was reckless in not knowing that Breckenridge's trades with New York Life were priced at off-market prices that were not reasonably related to prevailing market prices, or at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. Despite this, Cohen approved those trades and allowed them to settle, and took no steps to ensure that prices on trades between Suncoast and New York Life were fair. 22. Cohen, as a Suncoast principal, had a duty to treat New York Life fairly as a customer and to inform New York Life of material information relevant to their trading relationship. Cohen was bound by the rules of the NASD and Suncoast policies, which, among other things, forbade unfair pricing on securities trades. Cohen failed to disclose to New York Life the material information that Suncoast's trades with New York Life were unfairly priced. 23. O'Donnell, as a result of his experience and expertise in the pricing of fixed income securities, his knowledge of the prevailing market prices for the TBA securities that Breckenridge traded with New York Life, and his review of trade tickets and trade blotters for trades in TBA securities, knew or was reckless in not knowing that the TBA trades were priced at off-market prices that were not reasonably related to prevailing market prices, or at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. Despite this, O'Donnell executed those trades from January 1998 until May 1999 inclusive, and took no steps to ensure that the prices on those trades were fair. 24. O'Donnell, as a Suncoast trader, had a duty to treat New York Life fairly as a customer and to inform New York Life of material information relevant to their trading relationship. O'Donnell was bound by the rules of the NASD and Suncoast policies, which, among other things, forbade unfair pricing on securities trades. O'Donnell failed to disclose to New York Life the material information that Suncoast's TBA trades with New York Life were unfairly priced. 25. From approximately late January 1998 through May 1999, on at least nine trades with New York Life, Suncoast charged off-market prices that were not reasonably related to prevailing market prices. On the majority of its remaining trades with New York Life during that period, Suncoast priced securities at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. Zwick, Cohen, and O'Donnell Actively Participated in the
26. Breckenridge began trading with Shen in late 1997. By late January 1998, Breckenridge and Shen were engaged in a kickback scheme in which Breckenridge provided gifts and payments to Shen in exchange for order flow of trades. Zwick, Cohen, and O'Donnell each knew or was reckless in not knowing about the scheme and assisted Breckenridge in providing payments and gratuities to Shen and executing trades in furtherance of the scheme. 27. In late January 1998, Shen demanded that Breckenridge purchase for him two tickets to an NBA All-Star basketball game in New York City in exchange for a trade favorable to Suncoast. Breckenridge informed Zwick, Cohen, and O'Donnell about Shen's demand. Zwick, with Cohen's knowledge, agreed to purchase the tickets for Shen, procured the tickets from a ticket broker at Suncoast's expense for $6,400, and sent the tickets to Shen. Shortly thereafter, Shen rewarded Suncoast with a TBA trade at a price more favorable to Suncoast and detrimental to New York Life than was otherwise available in the market. 28. In or about March 1998, Shen demanded that Breckenridge place a $5000 "one-way" bet with him against the favored movie "Titanic" winning the 1997 Academy Award for best picture. The bet required Breckenridge to pay Shen $5000 if Titanic won; she would win nothing if it lost. Breckenridge informed Zwick, Cohen, and O'Donnell about the terms of the bet, and each encouraged Breckenridge to agree to the terms. Pursuant to the direction of Zwick, Cohen, and O'Donnell, Breckenridge made the bet. Shortly thereafter, Shen rewarded Suncoast with two TBA trades at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. After Titanic won the Academy Award, Breckenridge, with Zwick's knowledge and approval, paid Shen the $5,000. 29. From March 1998 until approximately January 1999, Breckenridge used one-way bets to bribe Shen in exchange for trades at prices more favorable to Suncoast and detrimental to New York Life than were otherwise available in the market. Zwick, Cohen, and O'Donnell each knew about the one-way bets and the fraudulent pricing of the trades; each understood that Shen would collect winnings but never pay losses; each knew that Shen always bet on the favored outcome. Zwick and Cohen each reviewed and approved the majority of these trades; O'Donnell executed the majority of the trades. 30. From time to time, Shen demanded other gifts and payments from Breckenridge as consideration for continuing the scheme. For example, in or about March 1998, Shen demanded that Breckenridge reimburse him for approximately $1,800 he had spent at strip clubs while visiting the Suncoast offices in Tampa, Florida, and threatened to cease trading with Suncoast if his demand was not met. When Breckenridge informed Zwick about the threat, Zwick directed Breckenridge to pay Shen the money he demanded. Zwick assisted Breckenridge to conceal the payment by advising her to pay by an untraceable cashier's check instead of by personal check. Pursuant to Zwick's direction, Breckenridge paid Shen the $1,800 demanded in or about March 1998. 31. In or about July 1998, Shen demanded tickets to a theatrical production in New York City as payment for continuing the scheme. When Breckenridge informed Zwick about Shen's request, Zwick directed Breckenridge (a) to comply with Shen's request; (b) to purchase the ticket from Suncoast's ticket broker; and (c) not to seek reimbursement from Suncoast, in order to conceal his and Suncoast's involvement. Pursuant to Zwick's direction, Breckenridge purchased the theater tickets at a cost of approximately $2,500 and provided them to Shen. 32. In or about April 1999, Shen demanded from Breckenridge another, unspecified, gift as payment to continue the scheme. When Breckenridge informed Zwick about Shen's demand, one of the Suncoast partners suggested that Breckenridge treat Shen to a vacation at Paradise Island in the Bahamas. Zwick directed Breckenridge to arrange a three-day vacation through Suncoast's travel agent, and later authorized a $1,115 reimbursement to Breckenridge for the cost of Shen's airfare and hotel stay. 33. In or about April 1999, New York Life questioned Shen about the price of one of his April trades with Suncoast. Shen falsely claimed that the price resulted from simultaneous, independent, identical errors he and Breckenridge had made in preparing their respective paperwork. Shen then advised Breckenridge that, to conceal the scheme from New York Life, Suncoast would have to change the price of the trade. When Breckenridge informed Cohen and O'Donnell of New York Life's suspicions about the price of the trade, each assisted her to conceal the scheme by changing the price of the trade. 34. Zwick, Cohen, and O'Donnell, as principals or traders at Suncoast, were each bound by the rules of the NASD and Suncoast internal policies. Both NASD rules and Suncoast internal policies, among other things, prohibited each of them from giving gifts with a cumulative value of more than $100 to any client in any calendar year. Both NASD rules and Suncoast internal policies distinguish gifts from business entertainment. Provision of sports or theater tickets are deemed business entertainment, for which the firm is permitted to reimburse its personnel, provided that the donor attends the event with the recipient. However, sports or theater tickets are deemed gifts subject to the $100 per year limitation if the donor does not attend the event with the recipient. 35. Zwick, Cohen, and O'Donnell, and each of them, participated in the scheme and took steps both to further and conceal the scheme. Zwick, Cohen, and O'Donnell, and each of them, failed to disclose to New York Life the material information that Breckenridge and Suncoast paid kickbacks to Shen and provided to him improper gifts and gratuities in exchange for trades. 36. In return for the trades, Breckenridge paid to Shen at least $50,800 and provided or arranged for him to receive at least $6,400 in non-cash gifts. As a result of the scheme, Suncoast realized gross profits in excess of $1,500,000 from the New York Life trades between January 1998 and May 1999. FIRST CLAIM Violation of Section 17(a) of the Securities Act 37. Paragraphs 1 through 36 are repeated and realleged as if fully set forth herein. 38. Section 17(a) of the Securities Act makes it unlawful for any person in the offer or sale of any securities by the use of any means or instrumentality of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly, to use any device, scheme or artifice to defraud, or to obtain money or property by means of any untrue statement of a material fact or any omission 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 to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. 39. By reason of the conduct described above, Defendants Zwick, Cohen, and O'Donnell, and each of them, violated Section 17(a) of the Securities Act. SECOND CLAIM Violation of Section 10(b) of the Exchange Act and Rule 10b-5 40. Paragraphs 1 through 36 are repeated and realleged as if fully set forth herein. 41. Section 10(b) of the Exchange Act and Rule 10(b)-5 thereunder make it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, from employing any device, scheme or artifice to defraud, or from making any untrue statement of material fact or omitting 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 from engaging in any act, practice or course of business which operates or would operate as a fraud or deceit on any person, in connection with the purchase or sale of any security. 42. By reason of the conduct described above, Defendants Zwick, Cohen, and O'Donnell, and each of them, violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. THIRD CLAIM Aiding and Abetting Violations of Section 10(b)
43. Paragraphs 1 through 36 are repeated and realleged as if fully set forth herein. 44. Section 20(e) of the Exchange Act [78 U.S.C. § 78t(e)] provides that any person who knowingly provides substantial assistance to another person in violation of a provision of the Exchange Act, or of any rule or regulation issued under the Exchange Act, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided. 45. By reason of the conduct described above, Defendants Zwick, Cohen, and O'Donnell, and each of them, knowingly provided substantial assistance to Breckenridge and Shen in their violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. By reason of that conduct, Defendants Zwick, Cohen, and O'Donnell, and each of them, violated Section 20(e) of the Exchange Act. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court:
Dated: April 21, 2003
http://www.sec.gov/litigation/complaints/comp18096.htm
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