U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19209 / April 27, 2005
Securities and Exchange Commission v. K.W. Brown & Co., 21st Century Advisors, Inc., K.W. Brown Investments, Inc., Kenneth W. Brown, Wendy E. Brown, and Michael S. Cimilluca, Jr., No. 05-80367-CIV-Middlebrooks/Johnson (S.D. Fla., filed April 27, 2005)
On April 27, 2005, the Securities and Exchange Commission (Commission) filed a complaint in the United States District Court, Southern District of Florida, against two affiliated investment advisers, K.W. Brown & Company and 21st Century Investment Advisers, Inc. (collectively, the Advisers), their affiliated broker-dealer, K.W. Brown Investments, Inc. (Brown Investments), their principals, Kenneth W. Brown and Wendy E. Brown, and a registered representative of K.W. Brown Investments, Michael S. Cimilluca, Jr., alleging violations of the antifraud, recordkeeping, and investment adviser reporting provisions of the federal securities laws.
The Commission's complaint alleges that between 2002 and 2004, Kenneth Brown and Cimilluca improperly profited from trading in securities that the Advisers also bought and sold on behalf of their clients. According to the Commission's complaint, in September 2002, Kenneth Brown and Brown Investments hired Cimilluca to day-trade the Brown Investments' proprietary account (the Brown Trading Account). As compensation for his day-trading, Cimilluca received 50% of all profits from the Brown Trading account. The Complaint also alleges that from September 2002 to May 2003, Cimilluca was also responsible for executing Brown Investments' customer trades, including trades for the Advisers' clients who maintained their brokerage accounts at Brown Investments. For these services, Cimilluca was only paid 1% of all commissions generated from trades he executed. The Commission's Complaint alleges that Cimilluca's compensation structure gave him an incentive to steer more profitable trades to the Brown Trading Account, and that he repeatedly allocated better prices on securities transactions to the Brown Trading Account than to the Advisers' clients. According to the Commission's Complaint, these favorable trades generated over $330,000 in profits for the Brown Trading Account.
The Commission's complaint also alleges that the Advisers routinely misstated their assets under management in Forms ADV filed with the Commission between May 2002 and March 2004, and failed to provide the Commission's staff with required books and records on a timely basis.
The Commission's complaint charges the Advisers with violating Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and with violating Sections 204, 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 (Advisers Act) and Rules 204-1(a)(2) and 204-2(a)(8), charges Kenneth Brown with violating, or aiding and abetting violations of, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 207, 204, 206(1), and 206(2) of the Advisers Act and Rules 204-1(a)(2) and 204-2(a)(8) thereunder, charges Wendy Brown with violating, or aiding and abetting violations of, Sections 204, 207, 206(1) and 206(2) of the Advisers Act, and charges Cimilluca and Brown Investments with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act. The complaint seeks, among other things, injunctive relief, disgorgement, and civil penalties. Simultaneously with the filing of the Complaint, the Advisers consented to the entry of an Order by the Court appointing a Special Monitor to review and recommend changes to the Advisers' compliance procedures.