UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No.40269 / July 28, 1998 Administrative Proceedings File No. 3-9658 ______________________________ :ORDER INSTITUTING In the Matter of :PUBLIC PROCEEDINGS, :MAKING FINDINGS AND PFS INVESTMENTS, INC. :IMPOSING REMEDIAL SANCTIONS : ______________________________: I. The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that administrative proceedings be instituted pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act) against PFS Investments, Inc. (PFSI), a broker-dealer registered with the Commission. In anticipation of the institution of these administrative proceedings, PFSI has submitted an Offer of Settlement (Offer) which the Commission has determined to accept. In determining to accept the Offer, the Commission has considered the remedial acts undertaken by PFSI and the cooperation PFSI has afforded the Commission staff. Solely for the purpose of these proceedings and any other proceeding 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 for those set forth in Section III.A. below, which PFSI admits, PFSI consents to the entry of this Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions (Order). II. Accordingly, it is ordered that proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and hereby are, instituted. III. On the basis of this Order and the Offer submitted by PFSI, the Commission makes the following findings: A.THE RESPONDENT 1.Registration with the Commission Since 1981, PFSI has been a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. During the relevant time period, from late 1991 through 1992, PFSI had supervisory responsibility for approximately 18,500 registered representatives. All of the PFSI registered representatives were independent contractors, the majority of whom worked part-time. PFSI registered representatives were licensed to sell only mutual funds. PFSI effected all securities trades at its home office, and not at the offices of the registered representatives. 2.Business Overview PFSI's business was, and continues to be, closely related to affiliated companies that sell other financial products. During the relevant time period, the affiliated companies included Primerica Life Insurance Company (Primerica Life), Primerica Financial Services Home Mortgages, Inc. and Primerica Financial Services, Inc. (Primerica) (together with PFSI collectively referred to as PFS). Of the four companies, three contracted with agents to sell specific financial products and the fourth, Primerica, provided administrative functions for the sales force. The predominant business of PFS was the sale of life insurance policies. In 1992, Primerica Life had approximately 108,000 agents, of whom approximately 18,500 were also registered representatives associated with PFSI. The sales strategy of PFSI and Primerica Life was closely connected and consisted of selling term insurance, rather than whole life insurance, to clients, and of offering clients the opportunity to invest the monies saved in reduced life insurance premiums in mutual funds offered by PFSI. During the relevant time period, PFSI registered representatives were compensated on a commission basis for their sales of approved mutual funds. In addition, agents received a percentage of the commissions earned by all individuals they recruited. B.SUMMARY This matter arises from PFSI's failure reasonably to supervise four registered representatives at an office located in Dearborn, Michigan (the Dearborn registered representatives), with a view to preventing violations of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. PFSI failed to have in place effective policies and procedures to follow up adequately on three complaints received about the Dearborn registered representatives' "selling away" activities as described below. As a result, PFSI failed reasonably to supervise the activities of the Dearborn registered representatives. C.THE DEARBORN REGISTERED REPRESENTATIVES' VIOLATIONS Beginning in the fall of 1991 through November 1994, the Dearborn registered representatives sold unregistered securities in a Ponzi scheme. The sales were not reflected on the books and records of PFSI and PFSI did not approve these sales which were prohibited by the registered representatives' contracts with Primerica.[1] During the relevant time period, the Dearborn registered representatives sold at least 14 offerings. Through the offerings, the Dearborn registered representatives and their marketing hierarchies raised approximately $27 million from over 2000 investors. When the scheme ended in 1994, substantially all of the monies raised from investors was lost. The Dearborn registered representatives violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by making misrepresentations and omitting material facts to investors, concerning, among other things, the financial condition of the offerer, the use of investor funds and the risks involved in the investment.[2] D.PFSI's FAILURE TO SUPERVISE 1.Compliance Structure During the relevant time period, the compliance activities for PFSI were conducted by three departments located at PFS corporate headquarters. The Government Relations Department (Government Relations) performed general compliance oversight functions for PFS, including providing advice to senior management on compliance policies and standards, monitoring and assisting other compliance units and providing oversight of investigations and disciplinary actions of agents. Additionally, Government Relations administered annual on-site compliance audits and handled all contacts with state and federal regulators. The second department was located at Primerica Life and was called the Agency Management Group (Agency Management). Agency Management handled life insurance agent misconduct issues and disputes, contract problems (including breaches of a contractual exclusivity requirement), customer complaints and problems arising from the submission of improper insurance business. Additionally, if disputes between agents were reported to Government Relations, they were usually referred to Agency Management. Finally, PFSI had a securities compliance department (PFSI Compliance). Primarily, it monitored annual compliance reviews, investigated customer complaints and filed regulatory forms. The investigative responsibilities of these three departments overlapped and issues were sometimes investigated by more than one department. During the relevant time period, Government Relations had approximately eight field auditors conducting on-site audits of all PFSI and Primerica Life offices throughout the country. Agency Management had a staff of approximately eleven investigators and PFSI Compliance had approximately three investigators working on investigations of complaints. 2.Investigations of Allegations of Wrongdoing The compliance structure at PFS included two primary procedures that could detect wrongdoing on the part of registered representatives. Agency Management and PFSI Compliance both had the ability to investigate complaints of wrongdoing. Additionally, the on-site audit and inspection of offices also offered an opportunity for detecting wrongdoing. However, these procedures were ineffective in detecting and preventing the Dearborn registered representatives' selling away activities. a.Complaints Received by the Compliance Departments of PFS Concerning Wrongdoing on the Part ofthe Dearborn Registered Representatives On three occasions in 1991 and 1992, PFS received letters or telephone calls from PFS agents alleging that a Dearborn registered representative was selling unauthorized investments. The compliance departments took certain limited investigative steps to review these allegations. At the time of the allegations, no action was taken against the Dearborn registered representatives and the compliance departments did not discover the Dearborn registered representatives' activities with respect to selling securities in the Ponzi scheme. The investigations of the allegations are described below. i.December 27, 1991 Complaint On December 27, 1991, a field auditor in Government Relations received a call from a PFS agent who requested anonymity and who alleged that one of the Dearborn registered representatives, Vecchioni, was selling investments not authorized by PFS. The caller claimed that potential investors were promised 60% annual returns and that Vecchioni was telling people that he had received 10% of the monies he had raised, over $150,000 in the past two months, from selling the unauthorized investments. The field auditor conducted an internal review which indicated that Vecchioni's commissions had dropped significantly over the year and that such a drop in commissions was reflected throughout his marketing hierarchy. [3] Government Relations did not conduct its own investigation, but rather referred the matter to Agency Management. Agency Management conducted a limited investigation on the entity offering the investment, and determined that Vecchioni was not an officer or director of the entity. Agency Management then contacted Vecchioni, informed him of the allegations, and obtained an oral denial of the allegations. Agency Management did not ask Vecchioni about his and his hierarchy's declining commissions. Based on such investigation, the case was closed and no action was taken. The matter was not referred to PFSI Compliance at this time, nor was a report of the investigation's findings and conclusions made to Government Relations. ii.February 11, 1992 Complaint On February 11, 1992, Agency Management received a complaint from another agent alleging that Vecchioni was selling unauthorized products. The agent enclosed a prospectus relating to the alleged investment being sold by Vecchioni which, among other things, promised a return of 67%. The prospectus did not mention the Dearborn registered representatives or PFS. Additionally, the agent alleged that the current unauthorized investment being sold by Vecchioni violated SEC, NASD and PFSI rules. The agent offered to provide details upon request. At the time of the receipt of the letter, PFS was in the process of terminating the agent because he had been dually licensed with a competitor. The Agency Management investigator who had reviewed the first complaint was assigned to investigate the second complaint. On March 25, 1992, he concluded that the agent was not credible and the new materials and allegations did not raise any new issues. He did not conduct any additional investigation and did not contact Vecchioni. Because Agency Management had received a prospectus from the complainant, it decided to forward the prospectus and information received in the December 1991 complaint to PFSI Compliance for review. Government Relations was not informed of the second complaint or the receipt of a prospectus relating to allegations made in both complaints. A supervisor in PFSI Compliance received the materials in March 1992. He discussed the materials and the steps taken in the Agency Management investigation with a counterpart in Agency Management. In July 1992, Vecchioni was sent a letter from PFSI Compliance outlining the allegations of wrongdoing and asking him to provide information regarding such allegations. Vecchioni again denied that he and agents in his marketing hierarchy were selling unregistered securities or using PFS meetings to attract clients for the investment relating to the prospectus. Based on this denial, and without taking any new investigative steps, PFSI Compliance concluded that no further action was necessary and closed its investigation. PFSI Compliance did not forward a report of the findings and conclusions of the investigation to either Agency Management or Government Relations. iii.August 13, 1992 Complaint On August 13, 1992, a PFS agent registered a complaint regarding potential selling away activities by Dearborn registered representative, Michael. Michael was a first-line recruit of Vecchioni. This complaint was received by PFSI Compliance. The complainant alleged that one of his PFS clients, who requested anonymity, had attended a meeting at which Michael solicited investors for oil and gas leases and passed out a prospectus. At the meeting Michael stated that they were raising $3 million and offered a financial incentive for people to sell these securities. Additionally, Michael passed out his PFS business card at the meeting. The complainant offered to obtain additional information, if necessary. A PFSI Compliance investigator was assigned to the case and sent a letter on August 26, 1992, to Michael. Michael responded by denying the allegations and affirmatively stating that no other PFS agents in his or related marketing hierarchies were selling the investment. On August 29th, Vecchioni sent a letter to PFSI Compliance supporting Michael's denial of the alleged activities. After receiving these two responses to the allegations, PFSI Compliance did not conduct any additional investigation. The investigator did not contact the complainant, who had offered to provide additional information. Additionally, PFSI Compliance never informed Agency Management or Government Relations of the third complaint. However, the PFSI Compliance investigator did, on September 3, 1992, send a memo requesting an on-site audit of the Dearborn registered representatives' offices because she believed PFS agents might be engaging in selling away activities. b.The On-Site Audit As stated above, on September 3, 1992, PFSI Compliance requested an on-site audit by the Government Relations department of the Dearborn registered representatives' offices. The request and investigator's opinion that the Dearborn registered representatives might be engaging in wrongdoing did not trigger a second audit. The August 25th audit was a preannounced audit. Before commencing the August 25, 1992 audit, the auditor checked PFSI's agent tracking system for open investigations and complaints involving Vecchioni but did not contact the source of those complaints. During the audit the auditor reviewed new account applications, customer correspondence, and the literature in the office to determine whether any unapproved products were being offered. Additionally, the auditor interviewed senior members of the PFS sales force in the same geographic area, but not in the same sales hierarchy, as the Dearborn registered representatives who were Vecchioni's competitors and may have had knowledge about the business conducted by Vecchioni's hierarchy. The auditor contacted them to determine if they had any information about the sale of unauthorized products. The auditor asked these PFS agents whether they knew of any other PFS agents in the area selling oil and gas leases. However, the auditor did not ask specific questions in which he mentioned the names of the Dearborn registered representatives. These activities did not reveal the selling away activities. Additionally, the auditor did not question the Dearborn registered representatives, or contact and question any people in their marketing hierarchies or customers, about the alleged selling away activities. Further, the auditor did not inspect the offices of two of the Dearborn registered representatives who shared office space with Vecchioni because such offices were locked at the time of the audit. Finally, the auditor did not conduct any follow-up relating to recent complaints about Vecchioni and agents in his hierarchy revealed in the PFSI agent tracking system. 3.Deficient Compliance Policies and Procedures The compliance structure at PFSI was deficient in that, as in this case, in instances of multiple or related complaints, an investigator could be unaware of earlier complaints or without full information concerning these complaints. This flaw was exacerbated by the lack of communication among compliance departments. Furthermore, the procedures in place at the compliance departments to investigate complaints were not reasonably designed to detect selling away activities. Specifically, in the investigations of the allegations about the Dearborn registered representatives, the most significant investigative technique used was to contact the subject of the complaint and ask if he committed the alleged activities. However, there were no procedures in place to verify the information which the Dearborn registered representative provided to the compliance departments. For example, the investigator did not contact the complainant, other agents in the hierarchy, or customers. Furthermore, no procedures were in place that ensured that a thorough investigation was made of Vecchioni and his hierarchy's declining commissions. As a result, under the facts and circumstances present here, the procedures were deficient in detecting and preventing selling away. Additionally, the compliance audits of local offices conducted by Government Relations in this case were deficient. Specifically, with respect to the August 25, 1992 audit of Vecchioni's office, there were no procedures in place to ensure a thorough follow-up of the allegations made to PFS of selling away. No one from PFSI met with or interviewed lower level registered representatives or customers to further investigate the selling away allegations. As a result, the procedures were deficient. 4.Legal Conclusion Based on the foregoing, PFSI failed reasonably to supervise the Dearborn registered representatives with a view towards preventing violations of the securities laws, within the meaning of Section 15(b)(4)(E) of the Exchange Act. IV. In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer of Settlement.[4] Accordingly, IT IS HEREBY ORDERED THAT: A.Respondent PFS Investments, Inc. be, and hereby is, censured; and B.Pursuant to Section 21B of the Exchange Act, PFS Investments, Inc. shall, prior to the close of business within ten business days after the date of entry of this order, pay a civil money penalty in the amount of $175,000 to the United States Treasury. The payment shall be by making a U.S. postal money order, certified check, bank cashier's check, or bank money order payable to the United States Securities and Exchange Commission, sending such money order or check to the Office of the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop 0-3, Alexandria, VA, 22312, along with a cover letter that identifies the Respondent's name and the administrative proceeding number of this matter. Simultaneously, the Respondent must send a copy of the cover letter and money order or check to Jane E. Jarcho, Senior Trial Counsel, Midwest Regional Office, Securities and Exchange Commission, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]:All PFSI representatives enter into written agreements with Primerica. These agreements prohibit a PFSI registered representative from: (i) selling financial products and services other than those approved by Primerica and (ii) acting as a registered representative of, or finder for, a broker-dealer other than PFSI. In addition, the PFSI Supervision Procedures Manual specifically prohibits "selling away." [2]:The four Dearborn registered representatives, Robert Vecchioni (Vecchioni), Charles Michael, Jr. (Michael), Gus Zoppi, Jr. (Zoppi) and Scott Sowles (Sowles), along with the offerer, Basic Energy and Affiliated Resources, were enjoined from violating the anti-fraud and registration provisions of the federal securities laws in SEC v. Basic Energy, 94 CV 74434 (E.D. MI). Additionally, the Dearborn registered representatives all consented to the entry of administrative orders against them. See In the matter of Gus Zoppi, Jr. and Scott Sowles, Exch. Act Rel. No. 36161 (Aug. 28, 1995) (three year bar for both respondents); In the matter of Charles Michael, Jr., Exch. Act Rel. No. 36561 (Dec. 7, 1995) (two year bar); In the matter of Robert Vecchioni, Exch. Act Rel. No. 36779 (Jan. 26, 1996) (five year bar from associating with any regulated entity and permanent supervisory bar). [3]:Vecchioni, a top salesman nationwide at PFS, recruited Michael, Zoppi and Sowles. In accordance with the companies' financial incentives to create marketing hierarchies, Michael, Zoppi and Sowles each created his own extensive and successful marketing hierarchy. The hierarchies, however, were related through Vecchioni and the four Dearborn registered representatives shared offices. [4]:Prior to the institution of this proceeding, PFSI voluntarily hired an independent consultant, not unacceptable to the Commission's staff, to review PFSI's supervisory, compliance, and other policies and procedures designed to prevent and detect violations of the federal securities laws of the nature discussed in this Order. PFSI has complied with the final recommendations made by the independent consultant.