U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19946 / December 18, 2006
Securities and Exchange Commission v. James Barlow Smith, et al., Civil Action No. 2:05CV453 (W.D. Pa.)
Commission Settles Charges Against James Barlow Smith Arising from Allegations of Fraud
Smith Agrees to Pay Civil Penalty of $55,000
The Securities and Exchange Commission (Commission) announced that it has settled its previously filed civil action against James Barlow Smith, the former Vice-President of Equity Trading at Advanced Investment Management, Inc., (AIM), an investment adviser located in Pittsburgh, PA. The Commission had filed a complaint, in the United States District Court for the Western District of Pennsylvania on April 6, 2005, against Smith and other principals of AIM seeking to permanently enjoin Smith and others from violating the antifraud provisions of the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934 (Exchange Act), and the Investment Advisers Act of 1940 (Advisers Act). Without admitting or denying the allegations of the complaint, Smith consented to the entry of a Final Judgment against him permanently enjoining him from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from violating or aiding and abetting violations of Sections 206(1) and 206(2) of the Advisers Act. Smith was also ordered to pay a civil penalty in the amount of $55,000.
The Commission also announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions against Smith, based on the entry of the permanent injunction. Pursuant to the Order, and without admitting or denying the findings contained therein, except those findings specifically identified in the Order, Smith has consented to a 12 month suspension prohibiting him from associating or seeking to become associated with any investment adviser.
The Commission's complaint alleges that officers and principals of AIM, including Smith, leveraged client assets in violation of investment advisory agreements by purchasing derivatives that caused excessive leverage without client knowledge, and then concealing the unauthorized trading in client accounts. As a result of the fraud, the complaint further alleges that clients suffered more than $415 million in losses, when, as the market steadily declined through the spring and early summer 2002, the portfolios began underperforming the S&P 500, Smith and other officers and principals escalated their use of leverage in a failed attempt to recover lost performance. The complaint also alleges that the majority shareholder, President and Chief Investment Officer, orchestrated and conducted the improper trading scheme between January 2002 and July 2002 with the assistance of fellow owner Smith. For further information about the civil proceedings, see SEC v. Jeff Thomas Allen, et al., Civil Action No. 2:05CV453 (W.D. Pa.) (LR-19170).