Raymond A. Parkins, Jr


UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933
Release No. 8055 / January 18, 2002

SECURITIES EXCHANGE ACT OF 1934
Release No. 45314 / January 18, 2002

INVESTMENT ADVISERS ACT OF 1940
Release No. 2010 / January 18, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10300

In the Matter of

Raymond A. Parkins, Jr.,

Respondent.

:
:
:
:
:
:
:
:
:
:		 ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, SECTIONS 15(b)(6), 19(h) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, AND SECTIONS 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940

I.

On September 25, 2000, the Securities and Exchange Commission ("Commission") entered an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b)(6), 19(h), and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Raymond A. Parkins, Jr.

II.

Respondent Raymond A. Parkins, Jr. ("Parkins" or "Respondent") has submitted an Offer of Settlement (the "Offer") for the purpose of resolving these proceedings, which the Commission has determined to acept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent Parkins consents to the entry of the findings, remedial sanctions and a cease-and-desist order, as set forth below.

III.

On the basis of this Order and Respondent Parkins' Offer, the Commission finds that:

Respondent

A. Parkins, 60 years old, resides in the Orlando, Florida, area.
B. From at least 1993 through 1996 (the "relevant period"), Parkins was the president of The Parkins Investment Advisory Corporation ("Parkins Advisory"), which was an investment adviser registered with the Commission. Parkins Advisory withdrew its registration with the Commission pursuant to a Form ADV-W that became effective on July 8, 1997.
C. During the relevant period, Parkins was also the president of The Parkins Investment Securities Corporation ("Parkins Securities"), which was a broker-dealer registered with the Commission. Parkins Securities withdrew its registration with the Commission pursuant to a Form BD-W that became effective on July 16, 1999.

Overview and Background

D. This matter concerns Parkins' fraudulent switching of his clients' variable annuity investments. During the relevant period, Parkins induced his investment advisory clients to switch variable annuities by providing them with unfounded, false, and misleading justifications for the switches and by misrepresenting or omitting to inform them of the sales charges associated with the switches. As a result of Parkins' fraudulent conduct, his clients incurred unnecessary sales charges of more than $168,000, and, in some cases, lost a portion of their investment principal. Parkins, on the other hand, received commissions of more than $210,000.
E. Variable annuities are long-term investments with an insurance component. The insurance component provides a death benefit for the owner's beneficiaries, guaranteeing that they will receive at least the amount of principal the owner invested (excluding any withdrawals or outstanding loans), regardless of the variable annuity's investment value at the time of the insured person's death. As with other life insurance products, earnings accumulate on a tax deferred basis and are taxed as ordinary income upon withdrawal. Each variable annuity contract includes subaccounts containing shares issued by a particular open-end investment company ("fund"). Generally, each variable annuity contract permits the purchaser to allocate the purchase price among a variety of funds with different investment objectives and investment styles.
F. Generally, the redemption of variable annuities less than six years after their purchase gives rise to back-end surrender charges, also referred to as contingent deferred sales charges ("CDS charges"). CDS charges decline over time, typically from 6% in the first year, to 5% in the second year, 4% in the third year, and so on, until phasing out completely six or sometimes seven years after purchase of the variable annuity. Each subsequent deposit into a variable annuity, however, begins its own declining CDS charge schedule which the client is charged if the account is redeemed. The owner of a variable annuity contract may reallocate his or her investment among the available mutual funds offered through the variable annuity without incurring CDS charges.
G. Beginning in the early 1990's, Parkins recommended the purchase of variable annuity contracts to his clients. At Parkins' suggestion, many of his clients invested in several variable annuities sponsored by various issuers and allocated their investments among most or all of the available mutual funds within each annuity. The percentage of the clients' portfolios invested in variable annuities generally increased throughout the 1990's, to the point that some clients held more than 70% of their portfolio in variable annuities. Pursuant to Parkins' recommendations, his clients invested most of the remaining portion of their portfolios in mutual funds -- Parkins rarely recommended investments in securities other than variable annuities or mutual funds.

Parkins' Switch Recommendations

H. At least 24 times from December 1993 through December 1996, Parkins recommended to at least 8 clients that they switch variable annuities, i.e., terminate their current variable annuities and use the proceeds to purchase variable annuities issued by another issuer. In many instances, Parkins recommended that his clients switch variable annuities even though they had recently (in some cases, within days) increased their investment in their existing variable annuity, thereby commencing a new CDS charge schedule. Parkins recommended switches to most of his clients, and without exception they acquiesced and authorized the switch. Parkins always recommended switching from one variable annuity to another; he never recommended that a client reallocate his or her investment within a current variable annuity among the mutual funds available through that variable annuity - a transaction that would be tax deferred and would not trigger a CDS charge. Consequently, all of Parkins' recommendations caused his clients to incur CDS charges and subjected them to a new CDS charge schedule.
I. During the relevant period, Parkins initiated his clients' switches among variable annuities. In letters he prepared and sent, on a continuing basis, to his clients, Parkins recommended that his clients switch their variable annuities. Along with the recommendation letter, Parkins sent the necessary forms for effectuating the switch. Before mailing the letters and accompanying forms, Parkins would designate on the forms the variable annuity funds to be purchased, and in what amounts. Parkins attached markers to the forms instructing the client where to sign or initial, as necessary, and also indicated to his clients that they should decline additional information offered by the state of Florida. In some cases Parkins misleadingly told his clients that "time is of the essence" and urged them to return the signed forms "as soon as possible."
J. During the relevant period, Parkins misled his clients about the costs of switching their variable annuities by omitting to inform his clients about those costs or by providing them with inaccurate information about those costs. In his letters, Parkins made misrepresentations or omissions including, but not limited to, the following:
  1. In his letters, Parkins often told his clients that the proposed variable annuity switch would be tax free and would not incur brokerage costs, but in at least eight letters recommending switches, Parkins' did not disclose the CDS charges the client would have to pay.
  2. In other letters, Parkins recommended the switch and briefly stated that "some" redemption charges were involved, but did not quantify the amount of those charges.
  3. In at least three recommendation letters in which Parkins quantified the amount of CDS charges, he minimized the importance of the charges, stating that he viewed the sales charges as "nominal" (even though they were approximately 3.4%, 5.85% and 6% of the total account value at the time of the recommended variable annuity redemption).
  4. In one letter, for a switch that resulted in a CDS charge of more than $27,000, Parkins did not quantify the CDS charge at all; instead he wrote that "the redemption charge will be offset by expanded diversification" presumably available in the newly established fund. However, this client's portfolio was already extremely diversified among numerous mutual fund holdings.
  5. In other letters, Parkins understated the magnitude of the sales charges involved in the variable annuity switch by also recommending other transactions which did not involve sales charges, then calculating the sales charge as a percentage of all recommended purchases, plus all recommended sales. These misrepresentations included, but were not limited to, letters Parkins sent to two clients, in which he recommended that the clients sell their mutual funds to purchase with the proceeds a new variable annuity, and added that "in order to move the above accounts we also need to transfer the existing variable annuity.... Where redemption charges exist to move the funds from the mutual funds and annuity, coupled with the transaction to establish the new [variable annuity], they will be in the range of 1-2%." Parkins' letters did not inform the clients that the CDS charge assessed upon redemption of the clients' existing variable annuity was in excess of 6% of the total account value at the time of redemption.
  6. In at least one instance, Parkins wrote that the client would not incur a sales charge. In fact the client was charged more than $13,000 in connection with the switch.
K. During the relevant period, Parkins also provided false and misleading information to clients at least seven times by providing them with annual reports that contained misleading statements, including, but not limited to, untrue statements that the client had not paid any CDS charges for transactions over the past year.
L. During the relevant period, Parkins also provided his clients with false and misleading information about his purported comparisons of variable annuities.
  1. Parkins typically implied that he had compared the existing and proposed investments and concluded that the post-switch variable annuity better served the client's needs than the pre-switch variable annuity. Parkins justified his recommendations in the letters by telling the client that he or she would benefit from increased "diversification," "balance," "tax deferral on earnings," "improved opportunity for return," and "emphasis on equity securities positions." In fact, Parkins had not performed any studies to determine whether the recommended switch was in his client's best interest. In addition, in most instances, the variable annuity that Parkins switched his client out of had, in the prior year, outperformed the variable annuity into which he switched his client.
  2. Moreover, although Parkins told his clients in at least 17 recommendation letters that the switch would improve their diversification, his clients were already invested in an extremely broad array of funds in both their overall portfolio and within their pre-existing variable annuities. For example, at Parkins' recommendation, one client had already divided her portfolio of approximately $220,000 into 30 funds of mutual funds, bond funds and variable annuities. In addition, in most instances, Parkins switched his clients from one variable annuity fund to a different variable annuity fund with identical objectives - giving rise, as a consequence, to CDS charges without any significant improvement in portfolio diversification.
  3. In at least three letters, Parkins also made false claims about the superior returns of the variable annuity funds he was recommending in comparison to the performance of the funds he was recommending the client redeem. For example, for one switch Parkins misrepresented the relative performance of the annuities, claiming that the recommended annuity was outperforming the current annuity by 11% on an annualized basis. In fact, the variable annuity issuers' return figures show that the annuity Parkins switched his clients out of actually returned 20.13% the prior year, compared with a return of 14.26% of the annuity he recommended his clients switch into.
M. The switches Parkins recommended, while depleting his clients' portfolios, substantially enriched Parkins through the commissions Parkins Securities received. In fact, as a result of at least 24 switches, Parkins' clients incurred a total of more than $168,000 in CDS charges, or, on average, more than 4.82% of their total account value at the time of redemption. Parkins Security received approximately $214,656 in commissions from these switches. In at least one year, variable annuity switches accounted for over half of Parkins Securities' commissions.
N. As a result of the conduct described above, Parkins willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder which prohibit fraudulent conduct in connection with the purchase, offer, or sale of securities.
O. As a result of the conduct described above, Parkins willfully aided and abetted and caused Parkins Advisory to violate Sections 206(1) and (2), which prohibit fraudulent conduct by an investment adviser.
P. As a result of the conduct described above, Parkins willfully aided and abetted and caused Parkins Advisory to violate Section 204 of the Advisers Act, and Rule 204-2(a)(7) promulgated thereunder, which requires registered investment advisers to make and keep true, accurate and current various books and records relating to their investment advisory business, including "originals of all written communications received and copies of all written communications sent by such investment adviser relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given, (ii) any receipt, disbursement or delivery of funds or securities, or (iii) the placing or execution of any order to purchase or sell any security."

Disgorgement and Civil Penalties

Q. Respondent has submitted a sworn Statement of Financial Condition, dated August 9, 2001, and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest. The Commission has reviewed the sworn Statement of Financial Condition, dated August 9, 2001, and other evidence provided by Respondent and has determined that Respondent does not have the financial ability to pay disgorgement of $214,656 plus prejudgment interest.
R. Respondent has submitted a sworn Statement of Financial Condition, dated August 9, 2001, and other evidence and has asserted his financial inability to pay a civil penalty. The Commission has reviewed the sworn Statement of Financial Condition, dated August 9, 2001, and other evidence provided by Respondent and has determined that Respondent does not have the financial ability to pay a civil penalty.

IV.

In view of the foregoing, the Commission deems it appropriate, in the public interest, and for the protection of investors to impose the sanctions specified in Respondent Parkins' Offer.

ACCORDINGLY, IT IS ORDERED that:

A. Parkins cease and desist, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 203(k) of the Advisers Act, from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 206(1), and 206(2) of the Advisers Act and Rule 204-2(a)(7) thereunder.
B. Parkins be, and hereby is, barred from association with any broker, dealer or investment adviser, with the right to reapply for association after two (2) years to the appropriate self-regulatory organization, or if there is none, to the Commission.
C. Respondent Parkins is liable to pay disgorgement in the amount of $214,656, plus prejudgment interest, but payment of the disgorgement amount and prejudgment interest thereon is waived, based upon Respondent's demonstrated financial inability to pay; and
D. If at any time following the entry of this Order the Division of Enforcement ("Division") obtains information indicating that Respondent's representations to the Commission concerning his assets, income, liabilities or net worth were fraudulent, misleading, inaccurate or incomplete in any material respect as of the time such representations were made, the Division may, at its sole discretion and without prior notice to Respondent, petition the Commission to enter an order requiring Respondent to pay disgorgement, prejudgment and postjudgment interest thereon, a civil money penalty, and any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent's Offer of Settlement had not been accepted. In connection with any such petition, the only issues shall be whether the financial information provided by Respondent was fraudulent, misleading, inaccurate or incomplete in any material respect as of the time such representations were made, the amount of civil penalties to be imposed and whether any additional remedies should be imposed. Respondent may not, by way of defense to any such petition, contest the amount of disgorgement or interest, the imposition of a civil money penalty, the findings in this Order or the Commission's authority to impose any additional remedies that were available in this proceeding.

By the Commission.

  Jonathan G. Katz,

Secretary