UNITED STATES DISTRICT COURT
SECURITIES AND EXHANGE COMMISSION,
SCHIELD MANAGEMENT COMPANY and
Plaintiff, the United States Securities and Exchange Commission, alleges the following for its complaint:
1. At the direction of its president, Marshall L. Schield, Schield Management Company, an investment adviser registered with the Commission, destroyed and altered documents it was required to produce during the course of a statutorily authorized Commission examination. Marshall Schield directed Schield Management personnel to destroy e-mails, tamper with logs reflecting losses suffered by clients due to trading errors, and destroy Personal Identification Numbers (PINs) used in trading.
2. Defendants Schield Management Company and Marshall L. Schield have engaged in and aided and abetted, are engaging in and aiding and abetting, and unless restrained and enjoined by this Court will engage in, and aid and abet, acts, practices, and courses of business that violate Section 204 of the Investment Advisers Act of 1940 [15 U.S.C. § 80b-4] and Rule 204-2 [17 C.F.R. § 275.240-2] thereunder.
3. The Commission brings this action pursuant to Section 209(d) of the Investment Advisers Act [15 U.S.C. § 80b-9(d)] 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.
4. The Commission seeks an order requiring Defendants to pay civil penalties pursuant to Section 209(e) [15 U.S.C. § 80b-9(e)] of the Investment Advisers Act.
5. This Court has jurisdiction over this action pursuant to Section 209(d) of the Investment Advisers Act.
6. 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.
7. Venue lies in this Court pursuant to Section 209(d) of the Investment Advisers Act, 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 in or have offices in Colorado.
8. Schield Management Company has been registered with the Commission as an investment adviser since 1972. The firm has approximately 12,000 clients and assets under management of $589,000,000. Schield Management offers a number of investment programs for clients and places the securities trades called for by each program. Clients are primarily invested in mutual funds and variable annuities. Schield Management's fees are calculated based on a percentage of assets under management and the firm collects them on a pre-paid basis, primarily annually. In May 2000, the Commission issued an order requiring Schield Management to cease and desist from violations of the Investment Advisers Act, censuring it and assessing a penalty against it. Schield Management is located in Littleton, Colorado.
9. Marshall L. Schield is the president, founder and majority owner of Schield Management. Except for a two-year hiatus in the early 1990s, Marshall Schield has been the president of the firm since its founding. In May 2000, the Commission issued an order requiring Marshall Schield to cease and desist from violations of the Investment Advisers Act, censuring him and assessing a penalty against him. He is the president and a majority owner of Schield Management's affiliated broker-dealer, Schield Securities, LLC. Marshall Schield resides in Littleton, Colorado.
10. On May 27, 2003, pursuant to its statutory authority, the Commission began an examination of Schield Management's books and records.
11. On May 27, 2003, the Commission examiners submitted a written request for records to Schield Management. During the examination, the Commission examiners also made oral requests for records.
12. Schield Management and Marshall Schield failed to produce and destroyed documents requested by the Commission. In addition, Schield Management and Marshall Schield destroyed documents requested by the Commission.
13. Schield Management is required by statute and Commission regulation to keep and maintain certain e-mails.
14. The Commission examiners' written request for records included e-mails. The Commission examiners also made an oral request that Schield Management produce e-mails.
15. After those requests were made Marshall Schield directed two of the firm's employees to destroy e-mails responsive to the Commission's request.
16. On June 4, 2003 Schield Management produced what it represented was a complete set of e-mails responsive to the examiners' request. It did not include the destroyed e-mails.
17. From time to time errors occur when Schield Management attempts to make a trade for a client. Schield documents these trading errors on manually written forms that it calls "Individual Position Reviews" or "IPRs." The firm then records most of the information contained in the IPRs on a spreadsheet that the firms calls an "IPR log."
18. The Commission examiners requested that Schield Management produce its IPRs and IPR logs.
19. Schield Management responded by producing several different, inconsistent versions of the IPR logs, none of which is complete or accurate.
20. It is not possible to determine from the logs produced the number or identities of all the clients affected by these errors, nor is it possible to calculate the gain or loss realized by clients due to the trading errors.
21. It is impossible to determine from the logs produced what, if any, losses by clients as a result of trading errors have been reimbursed.
22. Prior to the Commission's examination, Schield Management was using PINs issued to its clients by certain mutual funds to trade in its clients accounts and to circumvent trading restrictions imposed by the mutual funds.
23. At the beginning of the examination, Commission examiners requested records Schield Management maintained to document each instance in which it used a PIN to make a transaction.
24. Schield Management did not produce the records requested to the examiners.
25. After that examiners made the request concerning PINS, each securities trader at Schield Management who had PINs used to verify trades in his or her written records was directed to remove the PINs from the records.
26. One new list was made of all the PINs used to verify trades.
27. The new list of PINs was not produced to the Commission.
28. By failing to provide the records requested and by altering the records containing PINs, Schield Management hampered the ability of Commission representatives to understand Shield Management's use of PINs.
30. Schield Management failed to make and keep for prescribed periods such records and furnish copies thereof, as the Commission has prescribed as necessary or appropriate in the public interest or for the protection of investors and has failed to make all its records available for examination by representatives of the Commission.
31. By reason of the foregoing, Schield Management violated Section 204 of the Investment Advisers Act and Rule 204-2 thereunder.
32. Plaintiff repeats and realleges paragraphs 1 through 30 above.
33. Marshall Schield knew of Schield Management's violations of Section 204 of the Investment Advisers Act and Rule 204-2 thereunder and substantially assisted Schield Management in committing these violations.
34. By reason of the foregoing, Marshall Schield aided and abetted Schield Management's violations of Section 204 of the Investment Advisers Act and Rule 204-2 thereunder, and unless restrained and enjoined will continue to aid and abet violations of these provisions.
Wherefore, the Commission respectfully requests that the Court:
Find that the Defendants, and each of them, committed the violations alleged.
Enter a temporary restraining order, preliminary and permanent injunctions enjoining Defendants Schield Management Company and Marshall Schield, 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 204 of the Investment Advisers Act and Rule 204-2 thereunder.
Enter an order requiring that Schield Management provide an accounting showing the gain or loss to clients from trading errors from 1999 through the present and the extent to which loss due to trading errors has been reimbursed and an order prohibiting the destruction of documents.
Enter an order requiring each defendant to pay civil money penalties pursuant to Section 209(e)(2)(B) of the Investment Advisers Act.
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: July 23, 2003
Robert M. Fusfeld
Counsel for Plaintiff
Securities and Exchange Commission
1801 California Street, Suite 1500
Denver, Colorado 80202
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