UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION INVESTMENT ADVISERS ACT OF 1940 Release No. 1648 / August 13, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9362 ______________________________ : In The Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTIONS 203(e), FIRST CAPITAL STRATEGISTS, : (f) AND (k) OF THE INVESTMENT ROBERT E. FRITH, JR., KEITH : ADVISERS ACT OF 1940, MAKING H. CUNNINGHAM, PAUL J. : FINDINGS AND IMPOSING REMEDIAL GANGEMI AND JOHN J. MCCOLLUM, : SANCTIONS : Respondents. : : ------------------------------ I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted: (a) pursuant to Sections 203(e), (f) and (k) of the Investment Advisers Act of 1940 ("Advisers Act") to determine whether First Capital Strategists violated, and Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum<(1)> aided and abetted and caused violations of, Sections 206(1) and (2) of the Advisers Act; and (b) pursuant to Sections 203(e)(5) and (f) of the Advisers Act to determine whether First Capital Strategists, Robert Frith, Keith Cunningham and Paul Gangemi failed reasonably to supervise Kent Ahrens with a view to preventing his violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and Sections 206(1) and (2) of the Advisers Act. In anticipation of the institution of these administrative proceedings, Respondents have submitted Offers 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 to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.100 et seq., and without admitting or denying the findings set forth herein, Respondents consent to the entry of the findings and to the imposition of the remedial <(1)> First Capital Strategists, Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum are referred to collectively herein as "Respondents." ======END OF PAGE 1====== sanctions set forth below and to the issuance of this Order Instituting Proceedings ("Order"). Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(e), (f) and (k) of the Advisers Act be, and hereby are, instituted. II. On the basis of this Order and the Offers of Settlement submitted by Respondents, the Commission finds that<(2)>: A. Summary From 1992 through June 1995, Kent A. Ahrens, a trader at the investment adviser First Capital Strategists ("First Capital"), engaged in unauthorized trading that resulted in losses of approximately $137.6 million to First Capital's principal client, The Common Fund. While First Capital's four partners, Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum ("the partners"), evidently were not aware of Ahrens' losses or the extent of Ahrens' unauthorized trading, they made material misrepresentations and omissions to The Common Fund. The partners failed to disclose to The Common Fund that Ahrens frequently engaged in unauthorized day-trading that was inconsistent with the trading strategy that First Capital had undertaken on The Common Fund's behalf, and thereby exposed The Common Fund to an unauthorized level of risk. In a June 5, 1995 memorandum to The Common Fund, First Capital and Keith Cunningham, with the knowledge of John McCollum and Paul Gangemi, also misrepresented First Capital's internal controls. Further, on one occasion in 1995, First Capital and the partners reported to The Common Fund quarterly results that overstated the actual performance of one of its investment programs due to the inclusion of First Capital's undisclosed reimbursement of a $750,000 loss. Finally, First Capital, Frith, Cunningham and Gangemi failed to adequately supervise Ahrens with a view to preventing or detecting his securities law violations. B. Relevant Persons and Entities 1. Respondents a. First Capital Strategists is a registered investment adviser with four partners located in York, Pennsylvania. First Capital, which was founded in 1980, has been registered with the Commission as an investment adviser since April 7, 1994. During the relevant period, First Capital was registered with the Commodity Futures Trading Commission ("CFTC") as a commodity trading advisor. First Capital ceased doing business, except to wind up its affairs, beginning in late June 1995 after learning of Ahrens' concealed losses. <(2)> The findings herein are made pursuant to the Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== b. Keith H. Cunningham ("Cunningham"), age 49, Director of Operations, has been a partner at First Capital since 1980. c. Robert E. Frith, Jr. ("Frith"), age 54, founded First Capital and was the firm's Director of Investment Management. d. Paul J. Gangemi ("Gangemi"), age 56, a partner at First Capital since 1982, was the firm's Director of Research. e. John J. McCollum ("McCollum"), age 55, a partner at First Capital since 1981, was in charge of the firm's Client Services and Marketing department. 2. Other Relevant Person and Entity a. The Common Fund is a nonprofit membership corporation that manages $17 billion for 1,300 educational institutions. The investing institutions, or "members," of The Common Fund are able to choose from among 27 pooled investment funds, which are managed by numerous outside investment advisers. b. Kent A. Ahrens, age 39, began working for First Capital in 1983. He was in charge of the equity index arbitrage program since 1989. On October 22, 1996, Kent Ahrens was permanently enjoined from violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and (2) of the Advisers Act, by the United States District Court for the Middle District of Pennsylvania [SEC v. Kent A. Ahrens, 1 96 CV 1854 (J.Rambo)]. Ahrens consented to the entry of the permanent injunction, without admitting or denying any violation of the federal securities laws, which ordered him to pay disgorgement of $182,000. On October 15, 1996, the United States Attorney for the Middle District of Pennsylvania filed an information charging Ahrens with one count of mail fraud, to which he subsequently entered a guilty plea. C. Facts 1. First Capital's Equity Index Arbitrage Program In 1981, First Capital became the exclusive securities lending agent for The Common Fund. In 1982, The Common Fund authorized First Capital to pursue additional investment strategies to enhance income, including, in 1985, low-risk arbitrage strategies such as equity index arbitrage. In 1989, Ahrens assumed responsibility for First Capital's equity index arbitrage program. In First Capital's equity index arbitrage program, Ahrens took advantage of the difference between the prices of options or futures contracts, and the prices of groups, or "baskets", of stocks in an index. If the market for options or futures was out of line with the market for the basket of stocks, Ahrens bought the cheap side and established an equal and offsetting position or hedge by selling the other side. First Capital and The Common Fund both contemplated that First Capital's equity index arbitrage trades -- so-called "deals" -- would be protected against any ======END OF PAGE 3====== material market risk.<(3)> In September 1993, The Common Fund and First Capital agreed upon a set of trading Guidelines ("the Guidelines") that, among other things, required that all First Capital's arbitrage positions be fully covered: "A position is deemed to be fully covered if it is matched by a position that will have an equivalent offsetting value at the time the covered position is closed." First Capital earned a management fee of 33-1/3% on realized earnings on closed deals of the equity index arbitrage program. Ahrens received a fee of 12-1/2% of First Capital's fee. From 1992 through June 1995, First Capital earned approximately $3.9 million in fees from the equity index arbitrage strategy, and paid $455,465 of that to Ahrens. a. Ahrens' Unauthorized Day-Trading In the course of placing trades to execute equity index arbitrage programs, Ahrens often attempted to capitalize on intra-day fluctuations in the prices of index futures through day-trading, that is, buying and selling futures in the same day without hedging the open positions. This day-trading in pursuit of quick profits was inconsistent with the objectives of the equity index arbitrage program as authorized by The Common Fund in that positions taken by Ahrens often were not covered by matched positions. b. Ahrens' Undisclosed Unhedged Trading Sometime in early 1992, Ahrens failed to complete both sides of an equity index arbitrage transaction and the uncovered trade moved against him, resulting in a loss at the end of the day of approximately $250,000. Ahrens did not report the loss to the partners at First Capital or to The Common Fund. Rather, from early 1992 through June 1995, he attempted to recoup the loss by generally selling unhedged futures, options and securities. Ahrens concealed his trading and increasing losses by continuously rolling forward futures and options positions. Ahrens maintained losses in several deals, which he kept open to avoid having the losses reported to First Capital and The Common Fund. Ahrens' trading was unauthorized by First Capital and The Common Fund, and contravened the Guidelines. c. Ahrens' Concealment of the Loss From 1992 through June 1995, Ahrens concealed from First Capital, its partners and The Common Fund the increasing trading losses resulting from <(3)> Losses on arbitrage trades, if any, were to occur mainly from execution risks, changes in projected dividend payments, and tracking errors, when less than a complete basket of index stocks was purchased or sold. First Capital informed The Common Fund that a large number of transactions were entered into each year and that losses were taken on some, but that the vast majority were profitable. ======END OF PAGE 4====== his unauthorized trading. Ahrens falsely represented to First Capital that his positions were fully hedged, and that there were no problems with his trades. Also during this period, Ahrens failed to report to First Capital losses on deals which he kept open but should have closed. First Capital, in turn, failed to report Ahrens' losses to The Common Fund. Ahrens concealed the losses by taking advantage of First Capital's inadequate controls and supervision, including the limitations of the firm's accounting system, which was not designed to calculate the mark-to-market of the trader's position, as discussed more fully below. Ahrens first disclosed to the partners his trading losses on June 26, 1995. By that time, The Common Fund's losses had grown to approximately $137.6 million, which included the cost of the securities owned by The Common Fund that Ahrens had sold during his unauthorized trading and the cost of covering the short positions that Ahrens had taken. First Capital promptly informed The Common Fund of Ahrens' disclosures and has not transacted business as an investment adviser since that date, except to wind up its affairs. 2. Disclosure Violations a. Disclosures About Trading Frith, Cunningham and Gangemi<(4)> should have known that Ahrens was engaged in unauthorized unhedged day-trading of futures. For example, Ahrens informed Frith that he (Ahrens) occasionally incurred intra-day losses of between $50,000 and $100,000 from his day-trading in futures. In addition, from time to time Ahrens would tell Frith, Cunningham or Gangemi that he had day-traded large numbers of futures contracts, had left positions uncovered for hours at a time, or that he was responsible for a substantial amount of the day's S&P 500 Index futures trading volume. Frith, Cunningham and Gangemi failed to disclose Ahrens' day-trading to The Common Fund, even though such trading was inconsistent with the equity index arbitrage strategy authorized by The Common Fund. b. Disclosures About Controls At the end of May 1995, representatives of The Common Fund asked McCollum for a report outlining the safeguards First Capital had in place to protect against a rogue trader. In response to that request, Cunningham drafted a memorandum, dated June 5, 1995, about three weeks before Ahrens disclosed his trading loss to the partners, regarding "First Capital Safeguards." In the memorandum, Cunningham represented that: <(4)> McCollum, who was the liaison between First Capital and The Common Fund, spent most of his time at his own office in Connecticut or at The Common Fund's offices in Connecticut; the other three partners worked in First Capital's headquarters office in York, Pennsylvania. ======END OF PAGE 5====== "a daily review of the hedges being carried against open positions is conducted by a knowledgeable [First Capital] staff member, but never the trader involved" and that close supervision of traders was "augmented by system-generated `trade status' (mark-to-market) report which defines the components of a deal tied to current market prices." At the time he drafted the memorandum, Cunningham was aware that First Capital did not review hedges or generate independent mark-to-market reports and that First Capital's mainframe computer was not programmed to generate mark-to-market reports. Cunningham failed to inform The Common Fund that the safeguards described above were not actually in place.<(5)> McCollum and Gangemi, who saw the memorandum shortly after it was sent to The Common Fund, were aware that First Capital was not reviewing hedges and generating mark-to-market reports as described in the memorandum, but did not so inform The Common Fund. c. Inaccurate Disclosure of Investment Results As part of First Capital's fixed income arbitrage program for The Common Fund and another client, another trader engaged in fixed income arbitrage, placing so-called "basis trades," in which he sold bonds or other U.S. Government securities and hedged them by buying corresponding futures contracts. Basis trades were required to be hedged. In February 1993, the trader placed a $13 million basis trade for The Common Fund and a $10 million basis trade for another client in which he sold short U.S. Treasury bonds, and bought corresponding futures contracts. Between February 1993 and December 1994, the trader rolled the position forward several times. As an additional hedge, in December 1994, the trader placed a separate trade to cover the original position. This hedge position was intended to cover $40 million in basis positions for each of the two accounts, but the trader never put on the additional basis trades to reach $40 million. At that point, the hedge far exceeded the original basis position, creating substantial market exposure. In February 1995, the trader informed the partners for the first time that the mark-to-market loss on the trade exceeded $50,000. The partners examined the trade and then directed that the arbitrage deal be closed. The resulting $1.5 million loss was shared equally by the other client and The Common Fund. First Capital and the partners reimbursed both clients for their losses, and notified the other client about its loss. After a <(5)> At the time he drafted the memorandum, Cunningham expected that The Common Fund representatives would visit First Capital that week to discuss the safeguards. After Cunningham sent the memorandum to The Common Fund, the meeting was put off until several weeks later. ======END OF PAGE 6====== vote, in which Frith was the sole dissenter, the partners decided not to inform The Common Fund of the $750,000 loss. In March 1995, First Capital reported net investment income to The Common Fund of $1,629,700, including $95,500 in income from the fixed income arbitrage program. The income figure for the fixed income arbitrage program included the $750,000 reimbursement without disclosing that this amount was not generated by program trading. As a result, the report did not accurately reflect the profitability of the fixed income arbitrage program for the quarter. 3. Inadequate Supervision First Capital did not have adequate systems or procedures to prevent or detect violations of the securities laws by its traders. a. Accounting Under First Capital's accounting system, equity index arbitrage transactions were valued at their inception and at liquidation, when costs and sales prices, respectively, were used to value them; profit and loss in a particular deal was not realized until the transaction was closed out. There was no system in place to calculate the unrealized profit and loss in deals that had not yet closed and, as a result, losses in those open deals would go undetected. ======END OF PAGE 7====== b. Risk Management First Capital did not have an adequate risk management system in place. The firm did not verify the value of the traders' positions or ensure that arbitrage positions were fully hedged. The partners relied exclusively on the traders to quantify their open positions' exposure. To monitor the trading in the equity index arbitrage program, Frith, who was Ahrens' supervisor on the trading desk, asked Ahrens daily how he had fared, but did not independently verify Ahrens' oral response. First Capital maintained no effective separation of the accounting and trading functions. Ahrens had complete control over many aspects of his trading: he executed the trades; he was responsible for marking his positions to market; he was responsible for checking his hedges; he was responsible for determining which deals to close and which would be included in the profit and loss calculation for his strategy; and he had the authority to direct cash and securities movements through the custodian banks. Ahrens performed all of these functions with little or no supervision by Cunningham, the director of operations, or the other partners. To realize gains or losses in an equity index arbitrage transaction at First Capital, Ahrens closed a deal, at his own discretion, unwinding all futures, options and securities positions. Typically, an equity index arbitrage deal remains open for up to 90 days, which is the usual duration of a futures contract. Cunningham, who was aware of deals that Ahrens had kept open for several years, never examined those deals to determine whether Ahrens had a legitimate reason for keeping them open. The size and number of these old deals should have caused the partners, who knew that gains and losses in open deals were not realized by the firm's accounting system, to make further inquiry. Cunningham occasionally asked Ahrens to close his old deals, but he never required Ahrens to do so. As late as June 1995, Ahrens continued to hold open positions that had been initiated prior to September 1990. The Common Fund's unrealized losses occurred in many of those old deals. ======END OF PAGE 8====== D. Legal Analysis 1. Violations of Sections 206(1) and (2) of the Advisers Act a. First Capital As an investment adviser, First Capital is liable for acts performed by its partners and its employee, Ahrens. Ahrens knowingly engaged in unauthorized trading on behalf of The Common Fund, and concealed the related losses from First Capital and The Common Fund. He also provided false profit and loss reports to the partners, knowing they would -- and did -- incorporate that information into reports given to The Common Fund. Accordingly, Ahrens violated Sections 206(1) and (2) of the Advisers Act. The partners also violated Sections 206(1), as discussed more fully below, by inaccurately reporting certain of The Common Fund's earnings for the first quarter of 1995, and Cunningham, McCollum and Gangemi by misrepresenting to The Common Fund its controls in the June 5, 1995 memorandum. Frith, Cunningham and Gangemi also violated Section 206(2) by, as discussed more fully below, failing to disclose to The Common Fund Ahrens' day-trading. Through the actions of Ahrens and the partners, therefore, First Capital is liable for violating Sections 206(1) and (2) of the Advisers Act. b. First Capital Partners The partners aided and abetted First Capital's violations of Sections 206(1) and (2) of the Advisers Act. The standard for aiding and abetting liability is: (1) a primary violation; (2) substantial assistance by the aider and abettor of the primary violation; and (3) general awareness that the aider and abettor's conduct was part of an overall activity that was improper.<(6)> First Capital committed primary violations as a result of the acts of its partners, which are imputed to the firm. The partners therefore substantially assisted the firm's violations. <(6)> ITT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47-48 (2d Cir.), cert. denied, 439 U.S. 1039 (1978). ======END OF PAGE 9====== i. Section 206(1) -- Misrepresentations About Controls Cunningham knowingly misrepresented to The Common Fund on June 5, 1995, and Cunningham, McCollum and Gangemi subsequently failed to correct the misrepresentations, that certain controls, such as verifying hedges and marking to market, were in place to ensure compliance with the Guidelines. Those misrepresentations were material; the client could reasonably have been expected to rely upon First Capital's purported controls to ensure the safety of its funds that were invested in the equity index arbitrage program. Investment advisers are fiduciaries and, as such, have an "affirmative duty of 'utmost good faith, and full and fair disclosure of all material facts.'" SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963), quoting Prosser, Law of Torts, (1955), 534-535. Thus, the partners had a heightened duty to The Common Fund to disclose those material facts. ii. Section 206(1) -- False Reporting of Quarterly Earnings The partners also made a misrepresentation to The Common Fund when they inaccurately reported as earnings for the quarter ended March 31, 1995, $750,000 that had been reimbursed to the fund based upon trading losses, and omitted to disclose that this revenue resulted from a reimbursement. It is likely that a client would view the substantial unreported loss to be material, particularly in view of the fact that The Common Fund expected, and First Capital represented, that fixed income arbitrage trading would not have material market risk. First Capital's decision not to inform The Common Fund of the loss indicates that the firm believed the client would view the loss as material, even after being reimbursed. iii. Section 206(2) -- Failure to Disclose Unauthorized Trading Frith, Cunningham and Gangemi knew or should have known that Ahrens was day-trading futures regularly, but they failed to disclose to the client Ahrens' trading practices. This fact was material because Ahrens' trading elevated the risk to the portfolio significantly, and was not authorized by the Guidelines. ======END OF PAGE 10====== 2. First Capital and Frith, Cunningham and Gangemi's Failures to Supervise Section 203(e)(5) of the Advisers Act provides that the Commission may in the public interest place limitations on the activities or revoke the registration of any investment adviser if it finds that such person "failed reasonably to supervise, with a view to preventing [securities] violations . . . , another person who commits such a violation, if such other person is subject to his supervision," and Section 203(f) provides for sanctions against individuals associated with an investment adviser for the same conduct. a. First Capital First Capital failed to implement a system reasonably designed to prevent and detect Ahrens' trading activities. Frith, Cunningham and Gangemi relied too heavily on Ahrens' trustworthiness. The firm did not independently subject his positions to a mark-to-market analysis or daily review to ensure his positions were hedged, and failed to inquire adequately about Ahrens' aged deals and large volume of day-trading. The firm did not review order tickets or confirmations to verify Ahrens' trading activities. Frith and Cunningham rarely asked for written profit and loss reports from Ahrens, and never verified the data he provided. Further, Frith, Cunningham and Gangemi knew or should have known that Ahrens was engaged in risky day-trading, but did nothing to contain the risk. The partners ignored red flags, such as Ahrens' aged deals and heavy trading. In short, Ahrens operated in a system that lacked reasonable supervision. b. Frith, Cunningham and Gangemi Frith was responsible for supervising Ahrens' trading and Cunningham was responsible for overseeing the administrative processing of Ahrens' trades and the preparation of reports to clients. Therefore, both failed reasonably to supervise Ahrens. Gangemi also reasonably failed to supervise because, as a partner of First Capital, he was responsible for ensuring that First Capital employees were supervised properly. Although the partners had delegated responsibilities for overseeing Ahrens' trading activities to Frith and administrative responsibilities to Cunningham, Gangemi should have known that Frith and Cunningham were not adequately carrying out those supervisory responsibilities. Gangemi was aware that, among other things, Frith and Cunningham did not review whether Ahrens' positions were hedged, or mark-to-market Ahrens' open equity index arbitrage positions. Moreover, Gangemi knew or should have known that Ahrens was engaged in a large volume of unauthorized day-trading without adequate controls in place. Therefore, Gangemi should have known that the delegation of supervisory responsibilities was ineffective, and therefore is also liable for failing to supervise Ahrens. ======END OF PAGE 11====== III. FINDINGS Based on the above, the Commission finds that: A. First Capital Strategists willfully violated, and Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum willfully aided and abetted and caused First Capital's violations of, Sections 206(1) and (2) of the Advisers Act; and B. First Capital Strategists, Robert E. Frith, Jr., Keith H. Cunningham and Paul J. Gangemi failed reasonably to supervise Kent Ahrens with a view to preventing his violations of the securities laws. IV. OFFER OF SETTLEMENT The Respondents have submitted Offers of Settlement, in which they, without admitting or denying the findings herein, consent to the Commission's issuance of this Order which makes findings, as set forth above, and orders that: A. the registration of First Capital as an investment adviser pursuant to the Advisers Act be revoked; B. First Capital Strategists, Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum cease and desist from committing or causing any violation or future violation of Sections 206(1) and (2) of the Advisers Act; C. Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum be suspended for twelve months from association with any broker, dealer, investment adviser, investment company or municipal securities dealer; D. Robert E. Frith, Jr., Keith H. Cunningham and Paul J. Gangemi be barred from association with any broker, dealer, investment adviser, investment company or municipal securities dealer in a supervisory capacity with a right to reapply in five years; and E. First Capital Strategists, Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum disgorge $2.6 million to be paid within 60 days of the entry of the Order against them, and make all payments as specified below. V. ORDER Based on the foregoing, the Commission finds it appropriate and in the ======END OF PAGE 12====== public interest to accept the Offer submitted by the Respondents and to impose the relief consented to therein. Accordingly, IT IS HEREBY ORDERED that: A. The registration of First Capital Strategists as an investment adviser pursuant to the Advisers Act is revoked; B. First Capital Strategists, Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum shall cease and desist from committing or causing any violation or future violation of Sections 206(1) and (2) of the Advisers Act; C. Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum be suspended for twelve months from association with any broker, dealer, investment adviser, investment company or municipal securities dealer; D. Robert E. Frith, Jr., Keith H. Cunningham and Paul J. Gangemi be barred from association with any broker, dealer, investment adviser, investment company or municipal securities dealer in a supervisory capacity with a right to reapply in five years; and E. First Capital Strategists, Robert E. Frith, Jr., Keith H. Cunningham, Paul J. Gangemi and John J. McCollum shall together disgorge $2.6 million, to be paid within 60 days of the entry of the Order against Respondents, and make all payments by U.S. postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission, which payment shall be transmitted by certified mail to the Comptroller, Securities and Exchange Commission, Mail Stop 2-5, 450 Fifth Street, N.W., Washington, DC 20549, under cover of a letter that identifies the Respondents and the name and file number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Daniel A. Nathan, Assistant Director, Securities and Exchange Commission, Mail Stop 4-4, 450 Fifth Street, N.W., Washington, DC 20549. The Respondents' disgorgement payment shall be deposited into an account maintained by the Securities and Exchange Commission for the benefit of the members of The Common Fund who suffered the losses described hereinabove, and the monies shall be paid out directly to those members. The payment shall be allocated for those members in proportion to their actual losses in accordance with the formula developed by The Common Fund's special investigator (and approved by Respondents and the staff of the Securities and Exchange Commission). By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 13======