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U.S. Securities and Exchange Commission

Wayne M. Carlin (WC-2114)
Regional Director

Attorney for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
Northeast Regional Office
233 Broadway
New York, New York 10279
Telephone No.: (646) 428-1510
Fax No.: (646) 428-1981

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK



SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v.

IRVING PAUL DAVID,

Defendant.


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03 Civ. 6305 (KMW)

COMPLAINT

Plaintiff Securities and Exchange Commission for its Complaint against Defendant Irving Paul David ("Defendant" or "David"), alleges as follows:

SUMMARY

1. This action arises out of David's embezzlement of funds from two registered investment companies, and David's false certification of a report filed with the Commission. David, an employee of Citigroup Global Markets, Inc. (f/k/a Salomon Smith Barney, Inc.) ("Citigroup Global Markets"), stole a total of approximately $47,529 from two affiliated registered investment companies: Consulting Group Capital Markets Funds (the "Consulting Group Fund"), and Smith Barney World Funds Inc. (the "Smith Barney World Fund") (collectively, the "Funds"). In addition, at the very time that he was embezzling from these twofunds, David signed a certification pursuant to the Sarbanes-Oxley Act of 2002 in which he falsely stated that he had disclosed to the Consulting Group Fund's auditors and audit committee any fraud, whether material or not, involving fund management.

2. Through this conduct, David (a) violated Sections 34(b) and 37 of the Investment Company Act of 1940, 15 U.S.C. §§  80a-33(b) and 80a-36; (b) engaged in acts and practices involving personal misconduct in respect to registered investment companies for which he served as an officer, constituting a breach of fiduciary duty within the meaning of Section 36(a) of the Investment Company Act, 15 U.S.C. § 80a-35; and (c) aided and abetted the Consulting Group Fund's violation of Section 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(d).

3. Unless enjoined and restrained by this Court, David will continue to engage in the acts and practices alleged herein, and in acts and practices of a similar type and subject.

4. By this action, the Commission seeks: (a) permanent injunctive relief from future violations of Sections 34(b) and 37 of the Investment Company Act, and from aiding and abetting future violations of Section 15(d) of the Exchange Act; (b) permanent injunctive relief under Section 36(a) of the Investment Company Act barring David from serving as an officer, director, member of any advisory board, investment adviser, or depositor of any registered investment company, or as principal underwriter of any open-end registered investment company; (c) disgorgement of David's ill-gotten gains, plus prejudgment interest thereon; (d) civil penalties; and (e) such further relief as the Court deems appropriate.

JURISDICTION

5. The Commission brings this action pursuant to the authority conferred upon it by Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d); and Sections 36(a), 42(d) and 42(e) of the Investment Company Act, 15 U.S.C. §§ 80a-35(a), 80a-41(d) and 80a-41(e).

6. This Court has subject matter jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(e) and 78aa; and Sections 36(a) and 44 of the Investment Company Act, 15 U.S.C. §§ 80a-35 and 80a-43.

DEFENDANT AND RELEVANT ENTITIES

The Defendant

7. Irving Paul David, >age 42, was at all relevant times an employee of Citigroup Global Markets, a broker-dealer and investment adviser that was registered with the Commission in both capacities. David served as treasurer and CFO of the Consulting Group Fund and controller of the Smith Barney World Fund, two investment companies that were registered with the Commission. At all relevant times, David resided in Staten Island, New York, and worked in New York, New York.

Other Relevant Entities

8. The Consulting Group Fund is an open-end management investment company registered with the Commission since 1960. The Consulting Group Fund is a series fund that offers seventeen segregated portfolios of common stock. The Consulting Group Fund was required to, and did, file periodic reports with the Commission pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d), including reports on Form N-SAR.

9. The Smith Barney World Fund is an open-end management investment company registered with the Commission since 1960. The Smith Barney World Fund is a seriesfund that offers three segregated portfolios of common stock. The Smith Barney World Fund was required to, and did, file periodic reports with the Commission pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d), including reports on Form N-SAR.

DAVID'S EMBEZZLEMENT SCHEMES

10. Beginning in January 2001, David embarked upon a course of conduct that eventually developed into two schemes to embezzle money from the Consulting Group Fund and the Smith Barney World Fund.

The Consulting Group Fund Scheme

11. In one scheme, David stole checks that were delivered to the Consulting Group Fund in connection with the settlement of class action lawsuits or other corporate actions in which the Consulting Group Fund was a participant and was entitled to receive a payment. By virtue of his position as the Consulting Group Fund's treasurer and CFO, David had sole access to these "corporate action" checks, which were addressed to his attention and delivered to him at his office. Upon receipt of these checks, David endorsed them and deposited them into his personal checking account.

12. From January 2001 through January 2003, David embezzled a total of ten checks from three different portfolios of the Consulting Group Fund for a total of approximately $33,415.

The Smith Barney World Fund Scheme

13. In the second scheme, David redeemed shares out of an "error account" that had been established for the Smith Barney World Fund at its transfer agent. This "error account" had been created to facilitate the correction of errors in calculating the Smith Barney World Fund's net asset value following the reorganization of two of its portfolios.

14. After an error was corrected and the shareholders' ownership of the Smith Barney World Fund was adjusted, the transfer agent generated a statement reflecting the residual share amounts left in the error account and transmitted the account statement to David. The residual shares in the error accounts were owned by the Smith Barney World Fund.

15. Upon receipt of an account statement from the error account, David sent a letter to the transfer agent requesting that the residual shares be redeemed from the account, and instructing the transfer agent to deliver a check made payable to Irving David, care of Salomon Smith Barney, at the address on the account, which was David's business address.

16. David then personally endorsed the checks from the error account, just as he had done with the Consulting Group Fund corporate action checks, and deposited them into his personal checking account.

17. From August 2002 through September 2002, David embezzled four checks totaling $14,113 from the Smith Barney World Fund International All Cap Growth portfolio of the Smith Barney World Fund through this scheme.

Additional Misappropriated Checks

18. Through these two schemes, David obtained additional checks payable to the Funds totaling an additional $17,041. David had not yet deposited these checks into his personal checking account when his embezzlement was discovered on or about January 10, 2003. David returned these undeposited checks to Citigroup Global Markets shortly after he was terminated on January 16, 2003.

19. After his embezzlement was discovered, David repaid $33,000 of the amount he had embezzled, leaving a balance of $14,529 which he has not repaid.

DAVID'S FALSE SARBANES-OXLEY CERTIFICATION

20. Pursuant to Rule 30a-2 promulgated under the Investment Company Act and the Exchange Act pursuant to the Sarbanes-Oxley Act, 17 C.F.R. §270.30a-2, David, as chief financial officer of the Consulting Group Fund, was required, among other things, to certify that he has disclosed to the investment company's auditors and audit committee "any fraud, whether or not material, that involves management or other employees who have a significant role in the investment company's internal controls[.]"

21. On October 28, 2002, David signed the Rule 30a-2 certification of the Consulting Group Fund's semi-annual N-SAR filing for the six months ended August 31, 2002 and certified that he had made the required disclosure regarding fraud to the company's auditors and its audit committee.

22. During the reporting period covered by his certification, David had embezzled approximately $10,703 from the Consulting Group Fund. Contrary to his certification, David had not disclosed his embezzlement to the Consulting Group Fund's auditors or its audit committee. Accordingly, David's certification was false.

23. The false Rule 30a-2 certification on the Consulting Group Fund's August 31, 2002 Form N-SAR, which David signed, was filed with the Commission.

FIRST CLAIM FOR RELIEF

VIOLATIONS OF SECTION 37 OF THE INVESTMENT COMPANY ACT,
15 U.S.C. §§ 80a-36

24. The Commission repeats and realleges the allegations contained in paragraphs 1 through 23, above, by reference as if fully set forth herein.

25. As more fully discussed in paragraphs 1 through 19, above, David stole checks payable to the Consulting Group Fund and the Smith Barney World Fund totaling approximately $47,529 and deposited these checks into his personal bank account, thus unlawfully and willfully converting the Funds' monies for his own use.

26. By reason of the foregoing, David violated, and unless enjoined, will continue to violate, Section 37 of the Investment Company Act, 15 U.S.C. § 80a-36.

SECOND CLAIM FOR RELIEF

BREACH OF FIDUCIARY DUTY WITHIN THE MEANING OF SECTION 36(a) OF THE INVESTMENT COMPANY ACT, 15 U.S.C. § 80a-35(a)

27. The Commission realleges and incorporates Paragraphs 1 through 26 as if fully set forth herein.

28. As an officer of the Consulting Group Fund and the Smith Barney World Fund, David owed a fiduciary duty to the investors in the Funds.

29. As more fully described in paragraphs 1 through 19, above, by virtue of his embezzlement of monies belonging to the Funds, David engaged, and unless enjoined, will continue to engage, in acts and practices constituting a breach of his fiduciary duty involving personal misconduct in respect of registered investment companies for which he served as an

officer, within the meaning of Section 36(a) of the Investment Company Act, 15 U.S.C. § 80a-35(a).

THIRD CLAIM FOR RELIEF

VIOLATION OF SECTION 34(b) OF THE INVESTMENT COMPANY ACT,
15 U.S.C. 80a-33(b)

30. The Commission repeats and realleges the allegations contained in Paragraphs 1 through 29, above, by reference as if fully set forth herein.

32. As more fully set forth in paragraphs 1, and 20 through 23 above, on October 28, 2002, David falsely certified that he had disclosed to the investment company's auditors and audit committee any fraud, whether or not material, involving management, at the very time he was stealing money from the Consulting Group Fund. This false certification was filed with the Commission along with Consulting Group Fund's Form N-SAR for the six months ended August 31, 2002.

33. David's false certification that he had disclosed any fraud, whether or not material, involving management, was an untrue statement of a material fact.

34. By reason of the foregoing, David violated, and unless enjoined, will continue to violate, Section 34(b) of the Investment Company Act, 15 U.S.C. 80a-33(b).

FOURTH CLAIM FOR RELIEF

AIDING AND ABETTING A VIOLATION OF SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, 15 U.S.C. 78o(d)

35. The Commission repeats and realleges the allegations contained in Paragraphs 1 through 34, above, by reference as if fully set forth herein.

36. The Consulting Group Fund was required to file periodic reports with the Commission pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d), including reports on Form N-SAR.

37. As more fully set forth in paragraphs 1, and 20 through 23 above, on October 28, 2002, David falsely certified that he had disclosed to the investment company's auditors and audit committee any fraud, whether or not material, involving management, at the very time he was stealing money from the Consulting Group Fund. This false certification was filed with the Commission along with Consulting Group Fund's Form N-SAR for the six months ended August 31, 2002.

38. By reason of the foregoing, David aided and abetted the Consulting Group Fund's violation of Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d), in that he caused the Consulting Group Fund to make a false filing with the Commission, and unless enjoined, he will continue to aid and abet violations of Section 15(d) of the Exchange Act, 15 U.S.C.§ 78o(d).

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that this Court:

1. Enter a Final Judgment:

  1. permanently restraining and enjoining David, his agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of the injunction by personal service or otherwise, from violating Section 37 of the Investment Company Act, 15 U.S.C. § 80a-36;

  2. permanently restraining and enjoining David, his agents, servants,employees, attorneys, and all persons in active concert or participation with him who receive actual notice of the injunction by personal service or otherwise, from violating Section 34(b) of the Investment Company Act, 15 U.S.C. § 80a-33(b);

  3. permanently restraining and enjoining David, his agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of the injunction by personal service or otherwise, from aiding and abetting any violation of Section 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(d);

  4. permanently restraining and enjoining David from serving or acting as an officer, director, member of any advisory board, investment adviser, or depositor of any registered investment company, or as principal underwriter of any open-end registered investment company, pursuant to Section 36(a) of the Investment Company Act, 15 U.S.C. § 80s-35(a);

  5. directing David to disgorge his ill-gotten gains from the unlawful conduct alleged in this Complaint, and to pay prejudgment interest thereon; and

  6. directing David to pay civil monetary penalties pursuant to Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3), and Section 42(e) of the Investment Company Act, 15 U.S.C. § 80a-41(e), for the violations alleged herein; and

2. Grant such other and further relief as the Court deems appropriate.

Dated: August 21, 2003
New York, New York

Respectfully Submitted,

_____________________
LESLIE KAZON (LK-6777)
Assistant Regional Director
Attorney For Plaintiff
U.S. SECURITIES AND EXCHANGE
COMMISSION
Northeast Regional Office
233 Broadway
New York, NY 10279
Tel. (646) 428-1778

Of Counsel:

Wayne M. Carlin
Edwin H. Nordlinger
Mark K. Schonfeld

 

http://www.sec.gov/litigation/complaints/comp18300.htm

Modified: 08/21/2003