==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36838 / February 13, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8945 ------------------------------- : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTIONS 15(b) AND JOHN L. FAULS III : 19(h) OF THE SECURITIES : EXCHANGE ACT OF 1934, MAKING : FINDINGS AND IMPOSING REMEDIAL Respondent. : : ------------------------------- I. The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act) against John L. Fauls III (Fauls). In anticipation of the institution of these administrative proceedings, Fauls has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except for those contained in paragraphs II A., B. and C, below, which are admitted, Fauls consents to the entry of this Order Instituting Proceedings, Making Findings and Imposing Remedial Sanctions. II. Accordingly, it is ordered that proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and hereby are, instituted. On the basis of this Order and the Respondent's Offer of Settlement, the Commission makes the following findings-[1]-: A. The Commission's public files disclose that, from October 1977 until September 1993, Fauls was employed by a regional broker-dealer headquartered in Chicago, Illinois. During this time, Fauls served as, among other things, a Senior Vice President and Director and held between 10% and 25% ownership interest in the broker-dealer; B. On May 3, 1994, Fauls was found guilty of mail fraud, securities fraud, pension fund bribery and racketeering by a jury sitting before the United States District Court for the Northern District of Illinois. United States v. Robert Burstein and John L. Fauls III, No. 93 CR 80 (N.D. Ill., filed August 31, 1993). On October 24, 1994, Fauls was sentenced to 57 months incarceration and ordered to pay $3.32 million in restitution and to forfeit $3.32 million; C. On November 20, 1995, the United States District Court for the Northern District of Illinois entered an Order of Permanent Injunction and Other Equitable Relief (injunction), by consent, against Fauls which permanently restrains and enjoins Fauls from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and D. The jury found and the Commission's complaint alleged that from approximately January 1987 to approximately October 1990 (the relevant period), Fauls engaged in a fraudulent scheme of intra-day, prearranged trades in United States Treasury securities which defrauded the Union Carbide Pension Fund (Pension Fund), ensured profitable trades for a nationally chartered Midwest bank (the Bank) and enriched himself. As part of this scheme, Fauls failed to disclose to the Pension Fund and others that, during the relevant period: i. he, along with another individual who served as, among other things, a portfolio manager for the Pension Fund, devised and executed a trading scheme designed to ensure profitable trading for the Bank, a client of Fauls', and enrich himself, by needlessly injecting the Bank as a party between the Pension Fund and the market. The scheme also included trade allocations, under which the Bank was identified as the purchaser in transactions only after Fauls determined that the transactions were profitable while the Pension Fund was identified as the purchaser in unprofitable transactions; ---------FOOTNOTES---------- -[1]- The findings herein are pursuant to Respondent Fauls' Offer of Settlement and are not binding on any other person or entity named as a respondent in this case or any other proceeding. ii. he paid a kickback to the Pension Fund's portfolio manager, in connection with the sale of a boat, in exchange for the portfolio manager directing the Pension Fund's transactions to an account at the brokerage firm where Fauls was employed; iii. the trades so directed to Fauls were prearranged such that the Bank was insulated from market conditions by being guaranteed to obtain a profit and avoid losses. When the market price was moving up on a given day, Fauls would execute transactions so that the Bank would buy United States Treasury securities from the Pension Fund and in turn sell them on the same day in the open market. The price of the sale from the Pension Fund to the Bank would then be set lower than the open market trade, but within the day's trading range, thus guaranteeing a profit for the Bank. When the market price was moving down on a given day, Fauls would execute transactions so that the Bank would sell United States Treasury securities to the Pension Fund which would then sell those securities on the same day in the open market. The price of the sale from the Bank to the Pension Fund was set higher than the open market trade, but within the day's trading range. In addition, the prearrangement allowed Fauls to obtain two commissions for the transactions by interpositioning Fauls' brokerage firm between the ultimate purchaser or seller and the market; or that iv. Fauls, as a third component of the scheme, made purchases of United States Treasury securities in the early part of a trading day and sold those same securities near the end of a trading day without identifying the original purchaser. If the transaction was profitable, the Bank was always identified as the original purchaser while if the transaction resulted in a loss, the Pension Fund would be identified as the original purchaser. III. In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer of Settlement. Accordingly, IT IS ORDERED THAT: Fauls be, and hereby is, barred from association with any broker, dealer, investment adviser, investment company or municipal securities dealer. By the Commission. ==========================================START OF PAGE 3====== Jonathan G. Katz Secretary ==========================================START OF PAGE 4======