UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7346 / September 30, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9119 ___________________________________ : ORDER INSTITUTING PUBLIC In the Matter of : PROCEEDINGS PURSUANT TO : SECTION 8A OF THE M. CHARLES ZANATY, : SECURITIES ACT OF 1933, : MAKING FINDINGS AND Respondent. : IMPOSING RELIEF, AND : CEASE AND-DESIST ORDER ___________________________________: I. The Commission deems it appropriate and in the public interest that public administrative proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") be, and they hereby are, instituted against M. Charles Zanaty ("Zanaty"). II. In anticipation of the institution of these administrative proceedings, Zanaty has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, Zanaty without admitting or denying the findings set forth herein consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings and Imposing Relief, and Cease-and-Desist Order ("Order"). III. Based on this Order and the Respondent's Offer, the Commission finds-[1]- the following: ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to Zanaty's Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 2====== Zanaty, 47, is a real estate developer who resides in Birmingham, Alabama. In 1993, Zanaty had numerous telephone conversations about a so-called "roll program" with several individuals who explained the program to him and offered to compensate him if he obtained investors for their "roll program."-[2]- Zanaty never met these individuals and never learned anything of their financial or business background aside from what they told him in their telephone conversations. Zanaty's contacts did not respond fully when he requested additional information regarding the legitimacy of the program, and Zanaty took no other steps to verify its legitimacy. In late 1993, Zanaty arranged to meet an official of a city in Alabama. During that meeting, Zanaty told that official that if the Alabama city invested at least $10 million (purportedly in an account strictly under the control of the city), a trader would use that money to purchase unspecified instruments at a discount, would sell them at a profit, and would deposit those profits in the city's account. Zanaty also stated that the Alabama city would receive sufficient collateral to insure its investment and a fixed rate of interest. Zanaty's claims were not true. Zanaty also sent that official a memorandum of understanding, a joint venture agreement, a letter of evidence, an investment acknowledgement, and a specimen of the bond the Alabama city would receive to guarantee its investment. Those documents reaffirmed that the minimum investment was $10 million, indicated that investment would be guaranteed by an equivalent amount of U.S. Treasury Certificates held at a prominent brokerage firm, and stated that the Alabama city would earn 24% per annum. These representations were not true. Shortly after the meeting, the official informed Zanaty the Alabama city was not interested in the proposed investment. In August 1994, Zanaty and two associates arranged a meeting with another official of the same Alabama city. Zanaty informed that official that a minimum investment by the city of $10 ---------FOOTNOTES---------- -[2]- "Roll programs" are similar to and operate in essentially the same manner as fraudulent schemes involving "Prime Bank" instruments. Typically, they involve misrepresentations regarding the involvement of "prime banks" or references to the "top" world banks. They guarantee unrealistic rates of return and improperly use the names of large, well-known, domestic and foreign banks and brokerage firms. ==========================================START OF PAGE 3====== million would generate a return of 40% each year. Zanaty represented that he had done this type of deal before and that the returns would result from approximately 40 trades by a prominent New York brokerage firm in Grade AA commercial paper that would earn a profit for the city of 1% per trade. Zanaty also stated that the Alabama city's money would be invested by "top banks" throughout the world, that the New York brokerage firm where the money was deposited would be the fiduciary accepting full responsibility for the safety of the investment, that all of the trades would be conducted through that brokerage firm and that the investment risk would be low or minimal. Zanaty gave this official documents which confirm that Alabama city would be required to invest at least $10 million, that each trade involved Grade AA commercial paper issued by one of the "Top 25 World Banks" and that the brokerage house involved would act as a fiduciary. Zanaty, contrary to his representation to this official, had never convinced anyone to participate in this or a similar program. Moreover, the New York brokerage firm mentioned by Zanaty does not have a trading program like the one described by Zanaty and does not conduct trades for customers in Grade AA commercial paper. The remainder of Zanaty's claims were also untrue. Zanaty did virtually nothing to verify the legitimacy of the proposal he made to this official. He only asked those who presented the program to him if the Alabama city's investment would be secure and how the investment would be guaranteed and confirmed that the New York brokerage firm had a private investment department. The Alabama city subsequently informed Zanaty that it would not invest in this program. In late 1994, Zanaty sent a letter outlining a roll program to a high-ranking official of a large city in Georgia. Zanaty's letter stated that if the Georgia city deposited a minimum of $10 million in the New York offices of an international bank, those funds would be traded at least 40 times per year with each trade producing a profit of 1 1/8% interest for the city. The letter also guaranteed additional returns of 8% and referred to an irrevocable bank guarantee which would be issued by the international bank. On February 13, 1995, Zanaty and his associates met with several high-ranking officials of the Georgia city. Zanaty stated at that meeting that the city's money would not be at risk, that the city could get its money returned on ten days' written notice, that the investment would be guaranteed by an irrevocable bank guarantee, and that the trades would generate ==========================================START OF PAGE 4====== returns in excess of 40% per year. Shortly after this meeting, officials of the Georgia city informed Zanaty that the city would not invest any funds in this program. The international bank referred to by Zanaty does not issue irrevocable bank guarantees or bank guarantees of any sort to investors. Zanaty's other representations were also false and he did nothing to verify their legitimacy prior to making them. Prime Bank instruments do not exist. SEC v. Lauer, 52 F.3rd 667 (7th Cir. 1995). Nor do roll programs and other investments involving the "top world banks" and purported trading in prime bank and similar instruments. See, SEC v. Lauer, 864 F. Supp. 784 (N.D. Ill. 1994), aff'd, 52 F.3rd 667 (7th Cir. 1995). Zanaty knew that representations such as his statement that he had previously been involved in similar programs were false. Moreover, Zanaty's offer of the securities included verbal misrepresentations and documents containing misrepresentations which he had no basis to believe were accurate. Zanaty also completely failed to investigate his representations to determine their truth. IV. Based on the above, the Commission finds that during the years 1993, 1994 and 1995 Zanaty committed violations of Section 17(a) of the Securities Act. V. IT IS ORDERED, pursuant to Section 8A of the Securities Act, that Zanaty cease and desist from committing or causing any violation, and from committing or causing any future violation, of Section 17(a) of the Securities Act. By the Commission. Jonathan G. Katz Secretary