UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 36695 / January 9, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8918 ______________________________ : ORDER INSTITUTING PUBLIC In the Matter of : ADMINISTRATIVE PROCEEDINGS, : MAKING FINDINGS, AND IMPOSING Edward A. Cerullo : REMEDIAL SANCTIONS PURSUANT : TO SECTIONS 15(b) AND 19(h) : OF THE SECURITIES EXCHANGE : ACT OF 1934 ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding, pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"), be instituted to determine whether Edward A. Cerullo ("Cerullo") failed reasonably to supervise a registered representative ("RR"), within the meaning of Section 15(b)(4)(E) of the Exchange Act. II. In anticipation of the institution of this administrative proceeding, Cerullo has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, without admitting or denying the findings contained in this Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions ("Order"), except as to jurisdiction, which Cerullo admits, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. Section 201.100 et seq., Cerullo consents to the institution of a public administrative proceeding, the findings and the remedial sanctions set forth below. III. Accordingly, IT IS ORDERED that a public administrative proceeding pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and hereby is, instituted against Cerullo. IV. -------------------- BEGINNING OF PAGE #2 ------------------- On the basis of this Order and the Offer, the Commission finds that:-[1]- A. Cerullo was associated with a registered broker-dealer ("broker-dealer"), as a registered general securities principal since approximately 1979 and was head of the broker-dealer's Fixed Income Division ("FID") from 1986 through July 1994. B. A RR who served as a trader in the FID on the broker- dealer's Government Bond Desk was associated with the broker- dealer from approximately July 1991 until April 17, 1994, when the RR was terminated by the broker-dealer. From in or about February 1993, in addition to acting as a trader, the RR was also the manager in charge of the entire Government Bond Desk. The RR was subject to Cerullo's direct supervision from in or about February 1993 through April 17, 1994. C. During the period from at least approximately July 1991 through April 17, 1994, the RR described in paragraph IV.B. above willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by, in the offer or sale of securities, or in connection with the purchase or sale of securities, by the use of the means or instruments or instrumentalities of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly, employing devices, schemes or artifices to defraud; obtaining money or property by means of, or otherwise making, untrue statements of material facts or omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaging in acts, transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchaser. As part of that conduct, the RR engaged in a fraudulent scheme to falsely inflate the profits from his trading of government bonds and their constituent parts. He accomplished this by, among other things, causing entries to be made on the broker-dealer's trading and accounting systems that were recorded by the broker-dealer as profitable trades, when, in fact, these entries did not involve real trades with actual counterparties and, thus, lacked any economic significance. In addition, the RR misrepresented and omitted to state material facts to the broker-dealer's management and other employees in order to conceal his scheme. The entries that the RR caused to be made onto the broker-dealer's trading and accounting systems generated approximately $196 million of fictitious profits in 1993 alone, which concealed approximately $45 million of actual trading losses in that same year. The broker-dealer awarded the above RR a 1993 performance bonus of approximately $9 million. D. During the period from approximately July 1991 through approximately March 31, 1994, the broker-dealer willfully violated Section 17(a) of the Exchange Act and Rules 17a-3(a)(1), 17a-3(a)(2) and 17a-3(a)(7) thereunder in that the broker-dealer, while making use of the means and instrumentalities of interstate commerce, or of the mails, and while a registered broker or dealer, failed to make and keep current and accurate (1) --------- FOOTNOTES --------- -[1]-Any findings contained herein are solely for the purpose of these proceedings and are not binding on any other person or entity named as a respondent in any other proceeding. 2 -------------------- BEGINNING OF PAGE #3 ------------------- transaction journals containing an itemized daily record of the above RR's purchases and sales; (2) ledgers reflecting all assets and liabilities, income and expense and capital accounts; and (3) a memorandum of each of the above RR's purchases and sales on behalf of the broker-dealer. The inaccuracies in the broker- dealer's books and records resulted from the entries made by the RR as described in paragraph IV.C. above. E. During the period from approximately July 1991 through approximately April 1994, the RR described in paragraph IV.B above willfully aided and abetted and caused the broker-dealer's violations of Section 17(a) of the Exchange Act and Rules 17a- 3(a)(1), 17a-3(a)(2) and 17a-3(a)(7) thereunder as a result of the conduct described in paragraph IV.C. above. F. During the period from approximately March 1992 through approximately March 1994, the broker-dealer filed FOCUS reports, Part I and Part IIA of Form X-17A-5, for the quarters ended March 26, 1992, June 25, 1992, September 24, 1992, December 28, 1992, March 25, 1993, June 24, 1993, September 30, 1993, December 27, 1993, and March 31, 1994, which reports were materially inaccurate and/or incomplete as a result of the conduct described in paragraph IV.C. above. By reason of the foregoing conduct, the broker-dealer willfully violated Section 17(a) of the Exchange Act and Rule 17a-5 thereunder. G. During the period from approximately March 1992 through approximately March 1994, the RR described in paragraph IV.B above willfully aided and abetted and caused the broker-dealer's violations of Section 17(a) of the Exchange Act and Rule 17a-5 thereunder, in that, as a result of the conduct described in paragraph IV.C. above, the reports described in paragraph IV.F above were inaccurate. H. Cerullo failed reasonably to supervise the above RR within the meaning of Section 15(b)(4)(E) of the Exchange Act, with a view to preventing the RR's willful violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and the RR's aiding and abetting violations of Section 17(a) of the Exchange Act and Rules 17a-3(a)(1), 17a- 3(a)(2), 17a-3(a)(7) and 17a-5 thereunder, in that Cerullo did not monitor the RR's trading activities in sufficient detail to prevent and detect the RR's violations of the federal securities laws. For example, although Cerullo reviewed certain management reports, he did not review the details of the RR's transactions, such as examining the RR's trade tickets or other available information containing the details of the RR's trading. Furthermore, Cerullo failed to investigate adequately the RR's tremendous increase in profits. The RR's apparent profits increased from approximately $32 million in 1992, to approximately $150 million in 1993. V. In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer of Settlement. ACCORDINGLY, IT IS HEREBY ORDERED that: A. Cerullo be, and hereby is, suspended from association in a supervisory capacity with any broker, dealer, investment company, investment adviser or municipal securities dealer, for a 3 -------------------- BEGINNING OF PAGE #4 ------------------- period of twelve months, effective on the second Monday after the date of the Order; B. Cerullo pay a civil penalty in the amount of $50,000, pursuant to Section 21B(a)(4) of the Exchange Act, by transmitting it, within fifteen days after the entry of this order, in the form of a cashier's check, certified check or U.S. postal money order, made payable to the Comptroller, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, under cover of letter that identifies the respondent and the name and number of the administrative proceeding. A copy of the cover letter shall be simultaneously transmitted to Jonathan A. Gottlieb, Staff Attorney, 7 World Trade Center, New York, NY 10048; and 4 -------------------- BEGINNING OF PAGE #5 ------------------- C. Cerullo comply with his undertaking to provide to the Commission, within thirty days after the end of the twelve month period described above, an affidavit that he has complied fully with the sanctions described in paragraphs V.A. and V.B. above. By the Commission. Jonathan G. Katz Secretary 5