UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37164 / May 3, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8961 _________________________ In the Matter of : : ORDER MAKING FINDINGS KENNETH A. ZAK : AND IMPOSING REMEDIAL : SANCTIONS BY DEFAULT : _________________________ Kenneth A. Zak (Mr. Zak) is in default under the Commission's Rules of Practice, Rules 155 and 220, 17 C.F.R.  201.155 and 201.220 (1996), because he failed to answer both the Order Instituting Public Proceedings (Order) which the Commission issued on February 23, 1996 and the Show Cause Order which I issued on April 4, 1996. Accordingly, I find that the allegations in the Order are true: Background A. From September 1987 to September 1990, Mr. Zak, a resident of Clinton, Connecticut, was a registered representative and an associated person of Colonial Equities Corp. ("Equities"), which was a broker-dealer registered with the Commission pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") from March 9, 1986 until December 1, 1990. B. From 1981 to September 1990, except for an approximately one-year period in 1988-1989, Mr. Zak was employed by Colonial Realty Company ("Colonial"), a West Hartford, Connecticut real estate company, and its affiliate Equities, selling securities in the form of limited partnership units in Colonial-related real estate syndications. Mr. Zak became a Colonial partner in 1989 and was responsible for recruiting, training and motivating the sales force. ==========================================START OF PAGE 2====== Guilty Plea to One-Count Information C. On June 17, 1993, Mr. Zak pled guilty to a one-count information charging him with federal income tax evasion relating to the sales commissions he received from Colonial.-[1]- On November 29, 1993, Mr. Zak was sentenced to four months in prison to be followed by four months of house arrest. He was also ordered to pay approximately $280,000 in back taxes for 1986 through 1988. D. In the stipulation attached to his plea agreement, Mr. Zak admitted the following: 1. Mr. Zak was at all relevant times employed by Colonial. 2. For calendar year 1986, Mr. Zak declared as net commission income from Colonial sources $254,972, when, in fact, he received at least $421,696 in net commission income from Colonial sources in that year. Therefore, Mr. Zak's claimed total taxable income for calendar year 1986 of $179,303 should have been a total taxable income of $346,027 for that year. Accordingly, Mr. Zak's claim on his Internal Revenue Service Form 1040 that he owed $74,746 in income tax for calendar year 1986 substantially understated the actual taxes owed for that year. Mr. Zak actually owed $158,108 for tax year 1986. 3. For calendar year 1987, Mr. Zak declared as net commission income from Colonial sources $310,473, when, in fact, he received at least $911,928 in net commission income from Colonial sources in that year. Therefore, Mr. Zak's claimed total taxable income for calendar year 1987 of $176,426 should have been a total taxable income of $777,881 for that year. Accordingly, Mr. Zak's claim on his Internal Revenue Service Form 1040 that he owed $63,251 in income tax for calendar year 1987 substantially understated the actual taxes owed for that year. Mr. Zak actually owed $294,811 for tax year 1987. 4. For calendar year 1988, Mr. Zak declared as net commission income from Colonial sources $210,383, when, in fact, he received at least $392,782 in net commission income from Colonial sources in that year. Therefore, Mr. Zak's claimed total taxable income for calendar year 1988 of $70,484 should have been a total taxable income of $252,883 for that year. Accordingly, Mr. Zak's claim on his Internal ---------FOOTNOTES---------- -[1]- U.S. v. Kenneth A. Zak, No. 3:93CR137 (JAC) (D. Conn. June 17, 1993). ==========================================START OF PAGE 3====== Revenue Service Form 1040 that he owed $21,727 in income tax for calendar year 1988 substantially understated the actual taxes owed for that year. Mr. Zak actually owed $78,850 for tax year 1988. 5. Mr. Zak knew at the time he signed and filed his Form 1040 income tax returns for calendar years 1986, 1987 and 1988 that he had misstated his income from Colonial sources, and he further knew that he, in fact, owed substantially more federal income tax than he had declared for those years. 6. Mr. Zak knowingly understated his Colonial-related income for calendar years 1986, 1987 and 1988 with the intention of defrauding the United States Government of taxes owed. E. Mr. Zak's criminal conduct forms the basis for an administrative sanction pursuant to Section 15(b)(6)(A)(ii) of the Exchange Act. For example, Mr. Zak's conduct involved the making of a false report (tax return). Injunction for Securities Law Violations F. On March 9, 1995, the Commission filed a Complaint for Injunctive and Other Relief (the "Complaint") against Mr. Zak and others in the United States District Court for the District of Connecticut. -[2]- The Complaint alleged that Mr. Zak violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. G. The Complaint alleged, among other things, that, between September 1989 and September 1990, Colonial conducted a fraudulent unregistered public offering of Colonial Constitution Limited Partnership ("CCLP") units. According to the Complaint, Colonial, with the knowledge, approval and participation of Mr. Zak and others, offered and sold units of CCLP based on false and misleading statements, delivered orally by Colonial salesmen and contained in CCLP offering materials, relating to guarantees, general partners' net worth, partnership cash flow, leasing rates, profitability, risk and other aspects of the offering. The Complaint alleged that Mr. Zak and others promoted the sale of CCLP units by offering investors (i) a money-back guarantee; (ii) a guaranteed minimum cash flow of 10% on the principal investment; (iii) a minimum preferred return of 14% (before the general partner profits from any capital transaction); and (iv) a projected return that exceeded 300%. According to the Complaint, ---------FOOTNOTES---------- -[2]- Securities and Exchange Commission v. Jonathan N. Googel, et al., Civil Action No. 395CV00420 (TFGD) (D. Conn.). ==========================================START OF PAGE 4====== Colonial salespeople also promised investors that CCLP units would earn high profits with "very low risk." The Complaint alleged that Colonial lacked a reasonable basis to make these representations. H. The Complaint also alleged that during the CCLP offering, Colonial employees, with the knowledge, approval and participation of Mr. Zak, systematically fabricated sworn financial statements, included as part of CCLP's subscription package, to overstate investor income and net worth so that the investors would appear to be accredited. According to the Complaint, Colonial altered these documents in order to create the false appearance that the CCLP offering was not required to be registered with the Commission. I. On November 6, 1995, the Honorable T.F. Gilroy Daly of the U.S. District Court for the District of Connecticut issued a Final Judgment of Permanent Injunction against Mr. Zak. The court, which entered this judgment based on Mr. Zak's default, found that he violated the registration and antifraud provisions contained in Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Mr. Zak was permanently enjoined from further violations of these provisions and ordered to disgorge $262,175.76 to the court, plus prejudgment interest thereon, for the benefit of defrauded investors. I find further that it is in the public interest to sanction Mr. Zak pursuant to Sections 15(b) and 19(h) of the Exchange Act. I ORDER that Kenneth A. Zak is barred from association with any broker or dealer and from association with any member of a national securities exchange or registered securities association. I FURTHER ORDER that the hearing scheduled to begin on May 7, 1996 be, and hereby is, cancelled. Brenda P. Murray Chief Administrative Law Judge