SECURITIES ACT OF 1933
Release No. 7945 /January 29, 2001
SECURITIES EXCHANGE ACT OF 1934
Release No. 43896 / January 29, 2001
ADMINISTRATIVE PROCEEDINGS
FILE No. 3-10413
In the Matter of PRUDENTIAL SECURITIES
Respondents. |
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ORDER INSTITUTING PUBLIC
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The Securities and Exchange Commission ("Commission") deems it appropriate in the public interest and for the protection of investors that public administrative and cease-and-desist proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21(c) of the Securities Exchange Act of 1934 ("Exchange Act"), against Prudential Securities Incorporated ("PSI"), Stuart P. Bianchi ("Bianchi") and John C. Burch ("Burch"). Accordingly, it is hereby ordered that proceedings pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h) and 21(c) of the Exchange Act be, and hereby are, instituted. II.
In anticipation of the institution of these public administrative proceedings, PSI, Bianchi and Burch have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. Solely for the purposes of these proceedings, and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein1, except for the jurisdiction of the Commission over each of them and over the subject matter of these proceedings, which are admitted, PSI, Bianchi, and Burch each consent to the entry of the findings and the imposition of the other sanctions set forth herein, and, in the case of PSI and Bianchi, the imposition of cease-and-desist orders against PSI and Bianchi. III.
On the basis of this Order and the Offers submitted by PSI, Bianchi and Burch, the Commission finds that:
Background
1. PSI, a wholly owned subsidiary of Prudential Securities Group, Inc., is registered with the Commission pursuant to Section 15(b) of the Exchange Act. PSI is a full service broker-dealer and a member of the Municipal Securities Rulemaking Board and all the major exchanges.
2. Bianchi, age 65, was a registered representative ("RR"), Financial Advisor and Senior Vice President -- Investments in PSI's branch office in Kenosha, Wisconsin ("Kenosha Branch") from September 1989 until December 1997. Bianchi worked in the securities industry from March 1969 until he retired from PSI in December 1997. He is no longer associated with any broker or dealer (and has not been since he retired from PSI). Bianchi's securities license with the National Association of Securities Dealers has lapsed.
3. Burch, age 44, is an RR at PSI, and was the branch manager of the Kenosha Branch from February 1991 until on or about June 1995. As the branch manager, Burch was the direct supervisor of the RRs in that office. He is no longer a branch manager or in any other supervisory position at PSI. Burch has worked in the securities industry since January 1982.
4. The Foundation For New Era Philanthropy ("New Era") was a Pennsylvania corporation that during the Relevant Period (as defined below) maintained its principal place of business in Radnor, Pennsylvania. New Era was incorporated in 1989 as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code.
5. John G. Bennett, Jr. ("Bennett") was the founder, chairman of the board and president of New Era. Bennett is 62 years old and, during the Relevant Period, he resided in Devon, Pennsylvania. During the relevant period, Bennett was a director of a group of well-known mutual funds.
Bennett's and New Era's Misconduct
6. From at least October 1993 through May 1995 (the "Relevant Period"), New Era and Bennett violated Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by offering and selling at least $100 million in unregistered securities in the form of notes, letter agreements, investment contracts or other evidences of indebtedness ("Notes") to several hundred NonProfit entities, such as colleges, church organizations, and charities (the "NonProfits"), and individuals and foundations desiring to provide funds to NonProfits of their choice (the "Beneficiary Donors"). The NonProfits and Beneficiary Donors were located throughout the United States.
7. During the Relevant Period, Bennett and New Era told NonProfits and Beneficiary Donors that, if they sent monies and publicly traded securities to New Era, they (or, in the case of monies and securities sent to New Era by the Beneficiary Donors, NonProfits), were guaranteed that their monies and securities would be matched in six or nine months by funds from "anonymous benefactors."2 Bennett and New Era represented to NonProfits and Beneficiary Donors orally or in written offering materials that: a) funds from NonProfits and Beneficiary Donors would be invested by New Era solely in treasury bills or other conservative government securities; b) investments in the treasury bills and government securities would be held in "escrow," "quasi-escrow" or "custodial" accounts in the name of the NonProfits or the Beneficiary Donors, or, in certain instances, in the name of New Era; c) each monthly fund would be overseen by a custodian that was "highly reputable and extremely well-known;" d) interest from the treasury bills would be used for New Era's operating expenses; and e) funds were guaranteed and would be matched in six months, or, in some cases nine months, by "anonymous benefactors" when the treasury bills matured.
8. Among the documents Bennett and New Era distributed to NonProfits and Beneficiary Donors was a brochure dated March 1994, that outlined New Era's "New Concepts" investment program (the "New Concepts Manual"). New Era made the following representations in the New Concepts Manual:
a. New Era maintained funds sent to it by NonProfits and Beneficiary Donors "in a custodial account and invested in safe and low risk vehicles" for six months;
b. If a NonProfit's or Beneficiary Donor's "participation . . . equals or exceeds $400,000," the funds would, at the NonProfit's or Beneficiary Donor's election, be "held in a `quasi-escrow' account" in which case the NonProfit or Beneficiary Donor would be provided with: i) "[t]he name of the custodian where your funds have been placed," ii) "[t]he name of the agent in charge of that account," iii) "[t]he investment vehicle used"; iv) "[a] code which would be given to the agent to designate your account," and v) "[a] name, [for the NonProfit or Beneficiary Donor] which would be the only one authorized to obtain that information;"3
c. There were six "anonymous benefactors" who provided the matching funds and only Bennett knew their identity. "Information regarding the Benefactors has been placed in a secure area" at New Era "should anything happen" to Bennett; and
d. Before any New Concepts Fund was established, New Era had secured matching monies for that month's fund from the Benefactors and New Era had entered into "three year trust agreements with the Benefactors guaranteeing that the matching funds will be made available in the approved amounts regardless of death or any other problem occurring with the Benefactors." New Era represented that "[n]o fund is ever established without the assurance that the matching funds will be made available under this agreement."
9.From at least March 1994 through April 1995, Bennett and New Era distributed one form or another of the New Concepts Manual to several hundred NonProfits and Beneficiary Donors throughout the country. Bennett and New Era publicly disseminated the New Concepts Manual, or documents very similar to it, in order to induce NonProfits and Beneficiary Donors to send monies and securities to New Era, and to participate in New Era's "double your money" programs. While some of the NonProfits and Beneficiary Donors were sophisticated and prominent institutions and individuals, many were not.
10. In reality, however, and apparently unknown to everyone other than Bennett, there were no "anonymous benefactors." Moreover, Bennett and New Era commingled funds sent to New Era by NonProfits and Beneficiary Donors and did not keep such funds in custodial, escrow or quasi-escrow accounts. For example, Bennett deposited nearly all the funds from NonProfits and Beneficiary Donors into a single account at PSI which was solely in New Era's name. Prior to the time of the supposed matches from the "anonymous benefactors," Bennett transferred funds from the New Era account at PSI to an account also in New Era's name at a bank in Pennsylvania from which the funds were distributed to NonProfits, thereby creating the illusion of doubling. New Era also misappropriated NonProfits' and Beneficiary Donors' funds and diverted substantial monies to other entities controlled by Bennett or used funds obtained from later participants in the New Era programs to pay earlier participants their promised doubled returns.
11. Enticed by Bennett's and New Era's "double your money" guarantees and assurances that funds sent by NonProfits and Beneficiary Donors to New Era would be invested by New Era in treasury bills or other conservative government securities, hundreds of such NonProfits and Beneficiary Donors throughout the country purchased New Era's Notes and sent substantial sums to New Era. In the first five months of 1995 alone, Bennett and New Era received more than $100 million from NonProfits and Beneficiary Donors. Bennett and New Era paid many NonProfits double the money they or Beneficiary Donors had sent to New Era. Bennett and New Era encouraged such NonProfits and Beneficiary Donors to send additional sums to New Era corresponding to later monthly New Concepts Funds. Many NonProfits and Beneficiary Donors did just that.
12. On May 15, 1995, New Era filed a petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for Eastern District of Pennsylvania ("Bankruptcy Court"), alleging that it owed over $500 million in liabilities and had only approximately $80 million in assets. On May 19, 1995, the Bankruptcy Court converted the proceeding into a liquidation proceeding pursuant to Chapter 7 of the Bankruptcy Code.
13. On May 18, 1995, the Commission filed an expedited enforcement action against Bennett and New Era in the United States District Court for the Eastern District of Pennsylvania ("District Court"). The Commission's complaint alleged that Bennett and New Era 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. The same day, the District Court entered a temporary restraining order enjoining Bennett from violating Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, freezing his assets, and directing him to provide an accounting. On June 12, 1995, the District Court issued a preliminary injunction order that continued the same relief against Bennett until final adjudication of that action.
14. On September 27, 1996, the United States Attorney's Office for the Eastern District of Pennsylvania obtained a grand jury indictment of Bennett charging him with sixteen counts of mail fraud, eighteen counts of wire fraud, one count of bank fraud, one count of making false statements to the government, three counts of filing false tax returns, one count of impeding the administration of the revenue laws, fifteen counts of money laundering, and twenty-seven counts of money laundering to promote an unlawful activity. The indictment further alleged that Bennett's conduct resulted in losses of $135 million and in the filing for bankruptcy protection by New Era in May 1995. On September 22, 1997, after accepting Bennett's plea of nolo contendere to all the criminal charges, the District Court sentenced Bennett to 12 years' imprisonment. Bianchi testified as a witness for the United States Attorney's Office at Bennett's sentencing hearing in September 1997.
15. On February 6, 1998, the Commission obtained a final judgment on consent against Bennett in the District Court that permanently enjoined him from violating Sections 5(a), 5(c), and 17(a) of the Securities Act, Sections 10(b) and 17(a) of the Exchange Act, and Rule 10b-5 thereunder, and, based on his demonstrated inability to pay, waived payment of disgorgement and did not impose a civil penalty. On the same day, the District Court granted the Commission's motion to voluntarily dismiss the remaining claims against the bankruptcy estate of New Era as that entity was defunct and in liquidation proceedings.
The Registered Representative's Misconduct
And PSI's Books and Records Violations
16. During the Relevant Period, PSI generally authorized Bianchi, with Burch's supervision, to develop customer relationships on PSI's behalf with entities and individuals.
17. During the Relevant Period, New Era opened and maintained brokerage accounts at PSI's Kenosha Branch for which Bianchi was the RR. New Era employed one such account, opened by New Era in its name ("New Era Account") as a depository for funds and publicly traded securities sent by NonProfits and Beneficiary Donors participating in New Era's monthly funds. In one instance, New Era and one NonProfit opened a separate account at PSI for that NonProfit's funds.
18. In connection with opening the New Era Account, Bennett provided documentation concerning New Era's tax-exempt status, as well as its credit history and audited financial statements to Bianchi, Burch and PSI. Bennett also informed Bianchi that he was a director of a well-known group of mutual funds. These facts, however, did not reduce the respondents' responsibility to respond appropriately to any signs of possible impropriety in the handling of the New Era Account.
19. Between February 8, 1994 and July 11, 1994, at New Era's request, Bianchi directly, and through his brokerage assistant, sent New Era seven letters (identical in form) on Bianchi's PSI stationery that indicated that $4.5 million in treasury bills had been purchased by New Era for the benefit of four NonProfits and one Beneficiary Donor and falsely stated that PSI had established separate "escrow" accounts for the benefit of each such NonProfit or Beneficiary donor ("Treasury Confirmation Letters"). (See discussion in Paragraph 45 below).
20. In or about December 1993 and February 1994, Bennett explained by letters to Bianchi's assistant (the "Instructional Letters"), which Bianchi reviewed, that "establishing `escrow' accounts" would "enable individuals who have placed money with us for matching purposes to verify their funds." Bennett further stated in one of those Instructional Letters that the treasury bills "would of course be part of the [New Era Account] but would have a sub-code [("access code")] that would apply to" a particular NonProfit or Beneficiary Donor. Bennett stated that when a NonProfit or Beneficiary Donor called PSI and provided the access code assigned by New Era, Bianchi and PSI were authorized to provide the following information: a) "They will be told that the funds are with PSI; b) "they will be given the name of the agent, i.e., Stu[art] Bianc[hi] and [Bianchi's assistant]; c) "they will be advised of the form of the investment vehicle, i.e., T Bills, CD, etc.;" and d) "[t]hey will be advised of the maturation date of the investment vehicle." In one of the Instructional Letters, Bennett also stated that New Era would provide the information in the first Treasury Confirmation Letter to the Beneficiary Donor referenced in that letter, and also stated that "[t]his will become somewhat a standard procedure when we establish these `quasi escrow' accounts."
21. Bennett further instructed Bianchi that PSI could provide no information to a NonProfit or Beneficiary Donor other than the four points of information described above regarding the particular treasury bill(s) assigned by New Era to the NonProfit or Beneficiary Donor that called PSI.
22. In or about March 1994, Bennett and New Era supplied Bianchi with a copy of one version of the New Concepts Manual that Bianchi reviewed and kept in his office. (See discussion in paragraphs 45 and 47 below).
23. Between January and July 1994, and in accordance with instructions by Bennett and New Era, Bianchi purchased for the New Era Account seven treasury bills totaling $4.5 million. These securities corresponded to the treasury bills identified in the Treasury Confirmation Letters that Bianchi sent to New Era at the request of Bennett and New Era. Bianchi did not maintain the treasury bills referenced in the Treasury Confirmation Letters in separate accounts, escrow or otherwise. In addition, although Bennett communicated to Bianchi and his assistant that New Era had purchased those seven treasury bills "for the benefit" of the NonProfits and Beneficiary Donors designated by Bennett and New Era and referenced in the Treasury Confirmation Letters, Bianchi did not indicate in PSI's official books and records, which consisted primarily of PSI's computer-based ledger system, any interests of these NonProfits and Beneficiary Donors with respect to these treasury bills. Instead, as instructed by Bennett and New Era, Bianchi maintained the treasury bills in the New Era Account.
24. Bennett and New Era provided the Treasury Confirmation Letters to the NonProfits and Beneficiary Donors that Bennett and New Era had assigned to the particular treasury bills. All but one of the NonProfits and Beneficiary Donors referenced in the Treasury Confirmation Letters subsequently sent additional funds to New Era to be included in monthly New Concepts Funds and, consistent with the terms in the New Concepts Manuals, they requested that New Era hold those funds in "quasi-escrow" accounts.
25. In or about May 1994, PSI distributed to all its supervisors and RRs a one- page addition to PSI's compliance manual entitled "Escrow and Pledge Accounts Policy" ("PSI's Policy"). PSI's Policy stated that "The Firm will not, except in extremely rare circumstances and with the prior written approval of the Regional Counsel and Regional Director, act as Escrow Agent on an Escrow Account." As to "Pledge or Collateral Accounts," PSI's Compliance Manual mandated that "Firm Policy generally prohibits Pledge Accounts or acknowledgment of a third-party's interest in the account of a client. [RRs] are prohibited from signing any document or in any way acknowledging a third party's interest in the account of client. If notification purporting to state a claim to, or interest in, a client's account is received, Regional Counsel should be contacted immediately."
26. On or about July 25, 1994, PSI's Administrator for the Midwest Region ("Regional Administrator") learned from another PSI branch office that the Kenosha Branch had provided one Treasury Confirmation Letter to New Era that inaccurately stated that an "escrow" account had been established at PSI for the benefit of a NonProfit.
27. On or about that same day, PSI's Regional Administrator instructed Bianchi's supervisor, Burch, who in turn instructed Bianchi, that the term "escrow" was incorrect and should not be used in communications relating to the New Era Account and that Bianchi should confirm to New Era that there were no escrow accounts.
28. In July 1994, Bianchi redrafted the Treasury Confirmation Letters so that the term "escrow" was no longer included. Burch reviewed and approved the revised format of the Treasury Confirmation Letters. At that time, Burch also reviewed Bennett's Instructional Letters. With Burch's approval, Bianchi provided Bennett and New Era with revised versions of the prior seven Treasury Confirmation Letters bearing the dates of the original letters ("Revised Treasury Confirmation Letters"). The Revised Treasury Confirmation Letters did not include the term "escrow" but retained the confirmation of New Era's assignment of access codes to the five NonProfits and Beneficiary Donors.
29. In a letter dated July 27, 1994, Bianchi advised Bennett that the term "`escrow' accounts was inadvertently used in" the Treasury Confirmation Letters and that "although the monies received from the [referenced] donors were invested per your instructions in US Treasury Bills and to be identified as such for the individual donors, they are not in fact escrowed." Bianchi added that PSI could continue to purchase treasury bills in the New Era Account that would be assigned to NonProfits and Beneficiary Donors in accordance with New Era's instructions. Bianchi also agreed to continue to send to New Era, as requested by New Era, correspondence in the form of the Revised Treasury Confirmation Letters that confirmed treasury bill purchases in the New Era Account and the "access codes" assigned by New Era for particular treasury bills to particular NonProfits and Beneficiary Donors. Bianchi confirmed that, in accordance with New Era's instructions, the NonProfit and Beneficiary Donor assigned by New Era to each "access code" could telephone Bianchi or his assistant and confirm the corresponding purchase of treasury bills. Bianchi also agreed (per Bennett's instruction) that PSI would not provide any NonProfit or Beneficiary Donor that telephoned PSI any other information regarding the New Era Account that New Era did not authorize to be released. This letter was also reviewed and approved by Burch.
30. No one from PSI provided the Revised Treasury Confirmation Letters to the five NonProfits and Beneficiary Donors that were referenced in the Treasury Confirmation Letters previously provided to New Era. In addition, no one from PSI informed the NonProfits and Beneficiary Donors referenced in the Treasury Confirmation Letters that those original letters sent to New Era falsely stated that escrow accounts had been established at PSI and that PSI was providing Bennett and New Era with the Revised Treasury Confirmation Letters.
31. From August 1994 through April 1995, at Bennett and New Era's direction, Bianchi purchased approximately 108 treasury bills for the New Era Account and kept records in the Kenosha Office that identified NonProfits' interests in these securities. Among other things, in nearly all the order tickets for the purchase of those treasury bills (in most cases in the client box of the order ticket), Bianchi wrote the names of, or made reference to, the NonProfits that Bennett and New Era had identified as being assigned to the treasury bills ("Order Tickets"). (See discussion at paragraphs 45 and 47 below). Despite his understanding that the treasury bills had been purchased as instructed by New Era for the benefit of particular NonProfits referenced on the Order Tickets, Bianchi did not establish separate accounts for each such NonProfit. Moreover, contrary to PSI's books and records and compliance procedures, Bianchi did not indicate the NonProfits' interests in the treasury bills in PSI's official books and records system.
32. During the period from August 1994 through April 1995, Bianchi and his assistant sent Bennett and New Era approximately 108 Revised Treasury Confirmation Letters that identified particular treasury bills purchased in the New Era Account on behalf of various NonProfits as instructed by New Era. The features of the revised confirmation system and the Revised Treasury Letters, particularly the assignment of access codes and treasury bills, corresponded to the description of the "quasi-escrow" accounts in the New Concepts Manual. Each Revised Treasury Confirmation Letter referenced a NonProfit and confirmed an "access" code that New Era had assigned to that NonProfit. Altogether, the Revised Treasury Confirmation Letters identified treasury bills purchased in the New Era Account totaling approximately $77.47 million.
33. During the period from January 1994 through April 1995, Bianchi's assistant, who worked under Bianchi's general direction, kept track of the various access codes assigned by New Era to the NonProfits on whose behalf treasury bills had been purchased in the New Era Account as instructed by New Era. Bianchi's assistant used a form made available to RRs at PSI to maintain hand written records of all securities transactions in customers' accounts, including the New Era Account ("Broker's Blotter"). In the Broker's Blotter (which was part of PSI's standard form to open customer accounts), Bianchi's assistant identified the deposit, purchase and sale of securities in the New Era Account and identified the NonProfits that held a beneficial interest in those securities. Next to the entries identifying treasury bill purchases in the New Era Account, the Broker's Blotter listed the name of the individual at the NonProfit designated by New Era that New Era had authorized to telephone PSI and the access code assigned to that NonProfit. Bianchi's assistant also maintained another handwritten ledger that listed only the treasury bill purchases and sales in the New Era Account that were listed in the Broker's Blotter; that document included the heading "quasi-escrow accounts" ("Securities Ledger"). Bianchi's assistant also created a typed list, which she periodically updated and provided to New Era, that reflected the treasury bills that were currently held in the New Era Account; that document contained the title "treasury portfolio" ("Treasury List"). Next to each treasury bill, the Treasury List included the term "FBO," shorthand for the term "for the benefit of," the NonProfit identified by New Era, the authorized individual from the NonProfit and the assigned access code.
34. Between July 1994 and April 1995, after receiving Revised Treasury Confirmation Letters, Bennett and New Era issued letters addressed to the NonProfits identified in PSI's Revised Treasury Confirmation Letters ("New Era Letters"). The New Era Letters restated the same points of information listed in the corresponding Revised Treasury Confirmation Letters provided by Bianchi and PSI: i.e., the maturation date and amount of the purchased treasury bill, the NonProfit assigned to that security, the access code assigned to the NonProfit, and PSI's toll-free number. However, unlike the Revised Treasury Confirmation Letters, the New Era Letters stated that New Era had established "quasi-escrow" accounts for the benefit of the NonProfits assigned by New Era to the purchased treasury bills.
35. Consistent with the terms of the New Concepts Manual, the New Era Letters were sent to NonProfits that had sent more than $400,000 for inclusion in a particular Monthly New Concepts Fund and had requested in writing to New Era that New Era establish "quasi-escrow" accounts for them. Many of the NonProfits who received New Era Letters in 1994 sent additional funds to New Era for inclusion in New Era's New Concepts Funds in 1995. Most of these NonProfits requested in writing to Bennett and New Era that their additional monies should be held in "quasi-escrow" accounts. Neither these NonProfits nor Bennett and New Era provided copies of any of these written requests to Bianchi, Burch or PSI.
36. During the period between August 1994 and April 1995, although on various occasions Bianchi and his assistant told Bennett and New Era that continued reference to "escrow" or "quasi-escrow" accounts was incorrect, and that such terms should not be used, Bennett and New Era continued to use the terms "escrow" and "quasi-escrow" in giving instructions to Bianchi and his assistant to purchase treasury bills in the New Era Account. For example, between February 1995 and March 1995, on four occasions, Bennett and New Era sent written instructions to Bianchi to purchase 13 treasury bills totaling $9.5 million for the benefit of eight identified NonProfits. In those written instructions, Bennett and New Era directed Bianchi to establish "quasi-escrow" accounts for those eight NonProfits.
37. Neither the NonProfits nor Bennett and New Era provided any of the New Era Letters to Bianchi, Burch or PSI. However, between August 1994 and May 1995, a dozen or more NonProfits who received New Era Letters telephoned Bianchi and his assistant and provided them with their "access codes" assigned by New Era. As directed by Bennett and New Era, Bianchi's assistant, and on occasion Bianchi, confirmed to these NonProfits the purchase of particular treasury bills corresponding to the access codes assigned by New Era to these NonProfits. In addition, Bianchi (at Bennett's request) on three occasions prepared and sent correspondence directly to three NonProfits, which confirmed that treasury bills had been purchased by New Era at its direction for the benefit of those NonProfits. At Bennett's direction, Bianchi did not disclose to the NonProfits who telephoned Bianchi and his assistant at PSI, or to the three NonProfits to whom Bianchi sent correspondence, that PSI did not maintain the treasury bills in "quasi-escrow" accounts and that PSI's official books and records system did not identify them as having any interests in those assigned securities. On some occasions Bianchi referred NonProfits to Bennett and New Era for more information, and at least on one occasion, Bianchi told a NonProfit that Bennett and New Era controlled the New Era Account.
38.From May 1994 through May 15, 1995, with the knowledge of Bianchi, Burch and PSI, New Era borrowed monies from PSI on a margin loan that used the treasury bills and other assets in the New Era Account as collateral. During the period May 1994 through May 15, 1995, the New Era Account incurred the following debit balances and interest charges:
| Month | Debit Balance | Interest Charged |
| May 31, 1994 | $ 378,847 | $ 1,690 |
| June 30, 1994 | $ 461,049 | $ 5,040 |
| July 31, 1994 | $ 0 | $ 2,904 |
| August 31, 1994 | $ 2,842,302 | $ 0 |
| September 30, 1994 | $ 4,243,923 | $ 12,645 |
| October 31, 1994 | $ 7,056,568 | $ 51,118 |
| November 30, 1994 | $10,211,120 | $ 40,549 |
| December 31, 1994 | $ 0 | $ 45,307 |
| January 31, 1995 | $ 978,561 | $ 11,670 |
| February 28, 1995 | $ 18,525,844 | $ 48,364 |
| March 31, 1995 | $ 23,299,999 | $ 86,605 |
| April 30, 1995 | $ 48,843,651 | $161,856 |
| May 12, 1995 | $ 36,440,518 | $274,048 |
39. At all times, the interest rate charged by PSI on New Era's margin loan balances exceeded the interest rate earned by New Era from the treasury bills held in the New Era Account. During the fall of 1994, Bianchi and Burch called Bennett and asked him why New Era had incurred the margin debt in view of the fact that the margin interest rate charged by PSI exceeded the rate of interest that the treasury bills earned. Bennett said he was aware of the margin debt and the margin interest charge, and advised Bianchi and Burch that he did not wish to sell the treasury bills to eliminate the balance. Bennett informed Bianchi and Burch that the reason New Era had incurred a margin balance was that the "anonymous benefactors" were late meeting their commitments to match monthly funds and that New Era borrowed funds from PSI for the purpose of meeting those commitments until New Era received pledged funds from the "anonymous benefactors." Bennett further represented that the "anonymous benefactors" would reimburse New Era for the margin interest charge. However, Bennett's explanation to Bianchi and Burch for the margin debit balance was inconsistent with the terms of the New Concepts Manual and should have prompted further inquiry.
40. During the Relevant Period, before six months had elapsed and each Monthly Fund had matured, with Bianchi's and Burch's knowledge, Bennett and New Era withdrew funds that had been sent by NonProfits to New Era and PSI for deposit in the New Era Account for specific Monthly Funds.
41. Having reviewed the New Concepts Manual and Instructional Letters, Bianchi knew, or should have known, that some or all of the NonProfits believed that their assigned access codes corresponded to the "quasi-escrow" accounts referenced in the New Concepts Manual and believed that the access codes confirmed their beneficial interests in the assigned treasury bills.
42. Bianchi did not disclose to the NonProfits the existence and the amount of the margin balance or the fact that New Era had used, and could continue to use, the treasury bills as collateral for margin loans PSI extended to New Era.
The Branch Manager Failed to Reasonably Supervise Bianchi
43. Burch was Bianchi's direct supervisor during the Relevant Period. At PSI, branch managers have primary responsibility for supervising RRs with a view to preventing violations of the firm's procedures and the securities laws. Branch managers also have the authority to sanction, suspend, or terminate RRs who violated laws or PSI's procedures.
44. During the period between February 1994 and April 1995, Burch failed to reasonably supervise Bianchi in the following respects:
45. First, Burch failed to enforce PSI's Policy. Although Burch reviewed at least the first Treasury Confirmation Letter before Bianchi, through his assistant, sent it to New Era, Burch failed to correct the misuse of the term "escrow;" inquire regarding the circumstances that led to the letter; enforce PSI's Policy generally prohibiting any acknowledgement of any third-party interest in a client's account; or notify PSI Regional Counsel, Regional Director or any other PSI official outside the Kenosha Branch of the letter. After PSI's Regional Administrator made him aware in July 1994 of the incorrect reference to "escrow" account in the Treasury Confirmation Letters, Burch spoke to Bianchi to ascertain whether Bennett and New Era had intended to establish escrow accounts, reviewed PSI's Policy and New Concepts Manual, and directed Bianchi to correct the Treasury Confirmation Letters. Subsequently, however, Burch reviewed and approved the Revised Treasury Confirmation Letters sent by Bianchi, directly or through his assistant, to Bennett and New Era that, contrary to PSI's Policy, referred to third-party NonProfits that were not holders of the New Era Account, but could nevertheless contact Bianchi or his assistant regarding particular treasury bills assigned by New Era to each such NonProfit. In addition, Burch reviewed and approved Order Tickets on which Bianchi, in violation of PSI's Policy, wrote the names of and made references to NonProfits that were not holders of the New Era Account and thus identified that such NonProfits had interests in the assigned treasury bills.
46. Second, Burch did not reasonably discharge his duty as the branch manager of the Kenosha Branch to implement PSI's policies and procedures requiring branch managers to review all incoming and outgoing correspondence. All incoming and outgoing mail for the Kenosha Branch went through operations personnel and was available for review by Burch, the branch manager. Burch either did not review, or failed to review carefully, certain correspondence between Bianchi (directly or through his assistant) and Bennett or New Era. This includes a) six of the seven Treasury Confirmation Letters; b) several Revised Treasury Confirmation Letters sent by Bianchi (directly or through his assistant) to Bennett and New Era; c) several letters that New Era and Bennett sent to Bianchi and his assistant that continued to use the term "quasi-escrow" or "escrow" in connection with the purchase of the treasury bills in the New Era Account; and d) at least three letters that Bianchi and his assistant sent to three NonProfits that confirmed that treasury bills had been purchased for their benefit as instructed by New Era.
47. Finally, Burch missed significant red flags that indicated that Bianchi was not properly following PSI's compliance and books and records procedures and that Bianchi's actions may have been facilitating wrongdoing by Bennett and New Era. These red flags included the following: the Treasury Confirmation Letters, Revised Treasury Confirmation Letters, Order Tickets, Instructional Letters, New Concepts Manual, and the monthly check blotters and monthly account statements for the New Era Account that indicated that New Era was borrowing funds from PSI and using the treasury bills in the New Era Account as collateral. Despite these red flags, Burch undertook an insufficient investigation of Bianchi's handling of the New Era Account and New Era's unusual system of allowing NonProfits that had been assigned access codes to call Bianchi and his assistant to confirm treasury bill purchases in the New Era Account. For example, although Burch caused Bianchi to correct the term "escrow" in the Treasury Confirmation Letters, at no time did Burch contact the NonProfits to determine their understanding of the handling of the New Era Account, including their understanding of a) the seven Treasury Confirmation Letters that referred to "escrow" accounts; b) the Revised Treasury Confirmation Letters that explained that NonProfits could telephone Bianchi and his assistant and confirm that particular treasury bills had been purchased in the New Era Account; c) the loan that New Era took against the treasury bills; or d) whether Bennett continued to make representations regarding the establishment of "escrow" or "quasi-escrow accounts in connection with the purchase of treasury bills at PSI.
PSI's Failure to Reasonably Supervise Bianchi
48. "The responsibility of broker dealers to supervise their employees by means of effective, established procedures is a critical component in the federal investors protection scheme regulating the securities market," In the Matter of Lehman Brothers. Inc., Exchange Act Release No. 37673 (Sept. 12, 1996)(citing In re Smith Barney, Harris Upham & Co., Exchange Act Release No. 21813 (Mar. 5, 1985)).
49. During the period between February 1994 and April 1995, PSI failed to reasonably supervise Bianchi with a view to preventing the violations described above. PSI's supervision was deficient as PSI's supervisory procedures did not provide meaningful review of the Broker's Blotters which PSI made available to RRs and some RRs maintained that could reasonably detect if such Broker's Blotters reflected information with respect to the ownership and beneficial interests held in securities purchased in accounts maintained by PSI that was materially different from the comparable information shown on PSI's official books and records. As described above, PSI's Policy, included in its Compliance Manual, prohibited establishing escrow accounts at the firm without the prior written approval of the Regional Counsel and Regional Director, generally prohibited RRs from signing any document or in any other way acknowledging a third-party's interest in the account of a client, and required immediate notice to Regional Counsel upon receipt of any notification purporting to state a claim to or interest in a client's account. In addition, since adopting a computerized record-keeping system more than a decade ago, PSI has required RRs to accurately reflect client's securities transactions in PSI's computerized books and records system. However, since adopting a computerized record-keeping system as its primary books and record system, PSI has also made available to RRs a written Broker's Blotter that RRs may use to keep track of clients' securities transactions. For more than a decade, PSI has been aware that a significant percentage of RRs, mainly the more senior RRs, employ the written Broker's Blotter as their primary means of keeping track of clients' securities transactions, and rely to a lesser extent on PSI's computerized books and records system. Nevertheless, PSI failed to adopt and implement reasonable procedures to review, at least on a sample basis, these Broker's Blotters in order to attempt to detect if RRs, such as Bianchi, entered information thereon indicating that persons or entities other than the holder of the account in which securities were purchased had interests in those securities, contrary to the information on securities ownership and interests entered in PSI's official computerized books and records.
50. While PSI earned commissions and interest totaling $781,000 from the transactions in the New Era Account, under a global settlement approved by both the Bankruptcy Court and the District Court, PSI paid approximately $18 million to the bankruptcy estate for New Era and various NonProfits and Beneficiary Donors who brought claims against PSI relating to Bennett's and New Era's wrongdoing and their use of the New Era Account at PSI.
F. Conclusions
51. As described in paragraphs III.6. through III.42. above, during the Relevant Period, Bianchi willfully aided and abetted and was a cause of Bennett's and New Era's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
52. As described in paragraphs III.16. through III.42. above, during the Relevant Period, PSI willfully violated, and Bianchi willfully aided and abetted and was a cause of PSI's violations of, Section 17(a) of the Exchange Act and Rule 17a-3 thereunder, as PSI failed accurately to reflect customer accounts.
53. As described in paragraphs III.16. through III.47. above, during the Relevant Period, Burch failed reasonably to supervise Bianchi, who was subject to his supervision, within the meaning of Section 15(b) of the Exchange Act with a view to preventing Bianchi's violations as described above.
54. As described in paragraphs III.16. through III.42. and III.48. through III.50. above, during the Relevant Period, PSI failed reasonably to supervise Bianchi, who was subject to its supervision, with a view to preventing and detecting Bianchi's violations as described above.
IV.
In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offers of Settlement.
A. Accordingly, IT IS HEREBY ORDERED that:
1. PSI cease and desist, pursuant to Section 21C of the Exchange Act, from committing or causing any violation and any future violation of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder; and
2. PSI pay, within ten days of the entry of this Order, a civil money penalty in the amount of Eight Hundred Thousand Dollars ($800,000) to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check, bank money order, or wire transfer; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22132-0003, or wire transferred pursuant to instructions from the Comptroller; and (D) submitted under or with a cover letter that identifies Prudential Securities Incorporated as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order, check or wire confirmation shall be sent to Alexander M. Vasilescu, Senior Trial Counsel, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, New York 10048.
A. Accordingly, IT IS HEREBY ORDERED that:
1. Bianchi cease and desist, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder;
2. Bianchi cease and desist, pursuant to Section 21C of the Exchange Act, from causing any violation and any future violation of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder;
3. Bianchi be, and hereby is, suspended from association for twelve months with any broker or dealer, effective on the second Monday after the date of the Order; and
4. Bianchi pay to the United States Treasury, within ten days of the entry of this Order, a) disgorgement in the amount of Twenty Eight Thousand and Two Hundred and Ninety-Three Dollars ($28,293), plus reasonable interest thereon from May 1995 to the date of the Order in the amount of Eight Thousand Dollars ($8,000), for a total amount of Thirty-Six Thousand and Two Hundred and Ninety-Three Dollars ($36,293), and b) a civil penalty in the amount of Twenty Eight Thousand and Two Hundred and Ninety-Three Dollars ($28,293). Such payments shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the United States Securities and Exchange Commission; (c) hand delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (d) submitted under cover letter which identifies Bianchi as a respondent in this proceeding, the file number of this proceeding, and the Commission's case number (NY-6260), a copy of which cover letter and money order or check shall be sent to Alexander M. Vasilescu, Senior Trial Counsel, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, New York 10048.
C. Accordingly, IT IS HEREBY ORDERED that:
1. Burch be, and hereby is, suspended from associating with any broker or dealer for a period of two months and from associating in a supervisory capacity with any broker or dealer for a period of nine months, effective on the second Monday after the date of the Order;
2. Burch pay to the United States Treasury, within ten days of the entry of this Order, a civil penalty in the amount of Fifteen Thousand Dollars ($15,000). Such payment shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the United States Securities and Exchange Commission; (c) hand delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (d) submitted under cover letter which identifies Burch as a respondent in this proceeding, the file number of this proceeding, and the Commission's case number (NY-6260), a copy of which cover letter and money order or check shall be sent to Alexander M.
Vasilescu, Senior Trial Counsel, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, New York 10048.
By the Commission.
Jonathan G. Katz
Secretary
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 In the case of Beneficiary Donors, New Era allowed the Beneficiary Donors to direct their doubled funds to the NonProfits of their choice.
3 During the Relevant Period, this "quasi-escrow" feature was selected almost exclusively by NonProfits rather than Beneficiary Donors.