UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 37468 / July 23, 1996 Administrative Proceeding File No. 3-9044 ______________________________ : ORDER INSTITUTING PROCEEDING, In the Matter of : MAKING FINDINGS AND IMPOSING : REMEDIAL SANCTIONS PURSUANT TO DAVID LEE PRINTY, : SECTIONS 15(b), 19(h) AND : 21C OF THE SECURITIES EXCHANGE Respondent : ACT OF 1934 ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute an administrative proceeding, and such administrative proceeding is hereby instituted, pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against David Lee Printy ("Printy") to determine whether he violated Sections 7(f)(1) and 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 3(b) of Regulation X promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). II. In anticipation of the institution of this proceeding, Printy has submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R.  201.1 et seq., and without admitting or denying the findings set forth herein, except that Printy admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Printy consents to the entry of the findings and remedial sanctions set forth below. ==========================================START OF PAGE 2====== -2- III. The Commission finds the following: A. SUMMARY In late 1992 and early 1993, Printy improperly obtained over $600,000 from Dean Witter Reynolds Inc. ("Dean Witter") by taking advantage of a clerical error made by Dean Witter. Printy was a trustee of a family trust that had a margin account ("Trust account") at Dean Witter that Printy controlled. When Printy caused a certificate for 150,000 shares of Health Concepts, Inc., which he knew had little or no market value, to be sent to Dean Witter for deposit into the Trust account, Dean Witter erroneously recorded the shares as those of Coastal HealthCare Inc., which was trading at over $24 a share. This mistake increased the recorded asset value of the Trust account from approximately $200,000 to nearly $4 million. Printy used the expanded margin borrowing power resulting from the error to purchase securities, write checks against the Trust account, and have money wired to his personal bank accounts. As a result, by the time Dean Witter discovered its error in February 1993, its margin loan to the Trust exceeded the Trust account's true asset value by more than $600,000. B. RESPONDENT David Lee Printy, age 50, resides in Rockport, Massachusetts. Between November 1, 1992, and February 28, 1993, Printy was a registered representative with Fortis Investors, Inc., a broker-dealer headquartered in Minnesota and registered with the Commission. C. FACTS 1. Dean Witter Makes a Mistake From August 1992 through February 1993, Printy was a co- trustee of the Andrea L. Printy Family Trust ("Trust"), and he controlled the Trust. In August 1992, Printy transferred the securities account of the Trust from First Bank National Association ("First Bank"), a Minnesota-based bank, to Dean Witter's Minneapolis office. By the end of September 1992, the great majority of Trust assets had been moved to Dean Witter. Sometime in early October 1992, Printy received the Trust's account statement for the period ending September 30, 1992. The statement accurately reflected a total asset value for the Trust account of $191,533.31. Shortly thereafter, Printy caused First Bank to send a stock certificate for 150,000 shares of Health Concepts, a company he controlled, to Dean Witter for deposit in the Trust account. ==========================================START OF PAGE 3====== -3- Printy knew that Health Concepts stock had little or no market value. When Dean Witter assigned an erroneous internal coding number to the Health Concepts stock certificate, the Trust was incorrectly credited with ownership of 150,000 shares of a publicly-traded company, Coastal Healthcare, which was then trading at $24.50 a share. As a result, the Trust account statement for October 1992, which Printy received in early November, erroneously reflected a total asset value of nearly $4 million. Printy realized that the October statement reflected an incorrect total asset value and an erroneous position of 150,000 shares of Coastal Healthcare, which Dean Witter had valued at $3,675,000. Printy had never heard of Coastal Healthcare and knew that the Trust owned no such stock. The account statement did not reflect Dean Witter's receipt of the Health Concepts stock certificate. 2. Printy Capitalizes on Dean Witter's Mistake On November 11, 1992, Printy spoke by telephone with the Trust account's stockbroker at Dean Witter and the stockbroker's assistant about the account's value. Printy did not tell either of them about the error. Instead, he requested that 15,000 shares of the Coastal Healthcare stock be sent to him. At about this time, Printy began to increase his withdrawals from the Trust account. In November 1992, Printy withdrew over $64,000 from the Trust account by wire transfer and check. On or before November 25, 1992, Dean Witter told Printy that it could not send him less than the entire block of 150,000 shares of Coastal Healthcare. Printy then requested that the entire block be sent to him. In response, Dean Witter sent Printy the Health Concepts stock certificate that Printy had originally caused to be delivered to Dean Witter. Around December 1, 1992, Printy returned the Health Concepts certificate to Dean Witter with a note that said, "This should stay in the Family Trust account." Dean Witter once again entered the Health Concepts stock certificate erroneously as Coastal Healthcare. On December 8 and 9, 1992, Dean Witter moved the 150,000 Coastal Healthcare shares that had appeared in the Trust's cash account to its margin account. Around this time, Printy learned in conversations with the stockbroker's assistant that Dean Witter had repeated its error. Again, Printy made no effort to apprise anyone at Dean Witter of the error. Instead, during the rest of December, Printy bought about $662,000 worth of securities for the account on margin, and withdrew about $262,000 by wire and check. The Trust account statement sent to Printy in early January 1993 for December 1992 -- the month in which Printy had returned the Health Concepts certificate to the Trust account -- showed a ==========================================START OF PAGE 4====== -4- total asset value of $4,066,908.68, which Printy noted when he received the statement. He also noted that 150,000 shares of Coastal Healthcare, valued as of December 31 at $4,237,500, reappeared on the statement's list of assets. Thus, Printy was aware that as of the end of December the account's true asset value was negative. There was no listing on the statement for Health Concepts stock, just as there had been none on previous Trust account statements. During January 1993, Printy again made no effort to apprise anyone at Dean Witter of the error. Instead, he made further net purchases in the account of about $108,000, and withdrew about $373,000 more by wire and check. By month-end, the Trust account's erroneously-inflated net asset value was down to $3,177,048, over half a million dollars below the value of the erroneous Coastal Healthcare position -- $3,731,250 -- which was the sole basis for a margin loan that then exceeded $1.47 million. 3. Dean Witter Discovers Its Mistake In February 1993, Printy purchased for the account, on margin, additional securities costing about $100,000, and withdrew another $5,000. Some time after Printy returned the Health Concepts stock certificate to Dean Witter, Dean Witter discovered its mistake, and on February 24, 1993, Dean Witter issued a margin call on the account. Printy failed to answer the margin call. In March 1993, Dean Witter sold the securities in the Trust account and applied the proceeds, less commission, to the margin loan. The result was a negative balance in the Trust account of $583,173.81. Also in March 1993, Dean Witter commenced an arbitration proceeding against Printy, his co-trustees, and the Trust before the National Association of Securities Dealers ("NASD"). On January 20, 1994, the NASD arbitration panel issued a decision finding the respondents liable for compensatory damages of $634,820, plus interest from February 1, 1993 through the date of payment of the damages to Dean Witter, and Printy liable for punitive damages of $375,000. Printy has since filed for personal bankruptcy under Chapter 11. The bankruptcy court has approved Printy's plan, which calls for, among other things, the compensatory and punitive damages and interest owed to Dean Witter to be paid to the extent permitted by the liquidated value of certain of Printy's assets. D. LEGAL ANALYSIS Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, in connection with the purchase or sale of any security, making any materially misleading statement or omission, or engaging in activities which operate or would operate as a ==========================================START OF PAGE 5====== -5- fraud or deceit on any person. The antifraud provisions are violated when a person acts with scienter. By purchasing securities on margin in the Trust account in amounts that he knew greatly exceeded the value of the account's actual assets, Printy made knowing material misrepresentations of and omissions with respect to that value and engaged in activities that operated as a fraud and deceit on Dean Witter, and thereby violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Section 7(f)(1) of the Exchange Act prohibits borrowers from "obtain[ing], receiv[ing], or enjoy[ing] the beneficial use of a loan or other extension of credit from any lender . . . for the purpose of . . . purchasing or carrying . . . securities," unless the loan or credit complies with regulations promulgated by the Board of Governors of the Federal Reserve. Section 3(b) of Regulation X promulgated by the Federal Reserve Board prohibits borrowers from willfully causing brokers to extend credit in contravention of Regulation T by not conforming the credit to the margin requirement regulations applicable to the account. Regulation T mandates a margin requirement of 50% of the current market value of the security, or the percentage set by the regulatory authority where the trade occurs, whichever is greater. By knowingly causing Dean Witter to extend the Trust credit for securities purchases based solely on the collateral value of a mistakenly-included asset, Printy willfully caused Dean Witter to violate Regulation T, and thereby violated Section 7(f)(1) of the Exchange Act and Section 3(b) of Regulation X promulgated by the Federal Reserve Board. IV. FINDINGS Based on the foregoing, the Commission finds that Printy willfully violated Sections 7(f)(1) and 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 3(b) of Regulation X promulgated by the Federal Reserve Board. V. OFFER OF SETTLEMENT Printy has submitted an Offer of Settlement in which, without admitting or denying any of the findings set forth herein, he consents to the Commission's issuance of this Order, which orders that he: A. Cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 7(f)(1) and 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 3(b) of Regulation X promulgated by the Federal Reserve Board; and ==========================================START OF PAGE 6====== -6- B. Be barred from association in any capacity with any broker, dealer, investment adviser, investment company, or municipal securities dealer; provided, however, that Printy shall have the right to reapply to the appropriate self-regulatory organization or, if there is none, to the Commission, after a period of ten years from the date of entry of this Order. VI. Accordingly, IT IS HEREBY ORDERED: A. Pursuant to Section 21C of the Exchange Act, that Printy cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 7(f)(1) and 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 3(b) of Regulation X promulgated by the Federal Reserve Board. B. Pursuant to Section 15(b)(6) of the Exchange Act, that Printy be barred from association in any capacity with any broker, dealer, investment adviser, investment company or municipal securities dealer; provided, however, that Printy shall have the right to reapply to the appropriate self-regulatory organization or, if there is none, to the Commission, after a period of ten years from the date of entry of this Order. By the Commission. Jonathan G. Katz Secretary