UNITED STATES OF AMERICA
SECURITIES ACT OF 1933
SECURITIES EXCHANGE ACT OF 1934
INVESTMENT ADVISERS ACT OF 1940
INVESTMENT COMPANY ACT OF 1940
The Securities and Exchange Commission ("Commission") deems it appropriate in the public interest that a public administrative and cease-and-desist proceeding be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Sections 203(f) and (k) of the Investment Advisers Act of 1940 ("Advisers Act"), and Sections 9(b) and (f) of the Investment Company Act of 1940 ("Investment Company Act") against John Wellington Bagwell ("Bagwell").
In anticipation of the institution of this proceeding, Bagwell has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding 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 any findings contained herein, except that Bagwell admits to the jurisdiction of the Commission over him and over the subject matter of this proceeding, Bagwell consents to the issuance of this Order Instituting Public Administrative and Cease-And-Desist Proceeding, Making Findings and Imposing Sanctions and Cease-And-Desist Order ("Order").
Accordingly, IT IS ORDERED that a proceeding pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Sections 203(f) and (k) of the Advisers Act, and Sections 9(b) and (f) of the Investment Company Act be, and hereby is, instituted.
On the basis of this Order and Bagwell's Offer, the Commission finds that1:
A. Bagwell, age 39, was registered with the Commission as an investment adviser (File No. 801-43795) from April 1993 until he withdrew his registration in January 2000. He conducted his advisory business in Honolulu, Hawaii, as a sole proprietor under the name JWB Investment Advisory & Research. In connection with this business, Bagwell managed a registered investment company, the JWB Aggressive Growth Fund ("Fund") (File No. 811-9132). He was president and a trustee of the Fund. At its height, the Fund had approximately 60 investors and total net assets of $456,000.
B. Bagwell asserted a great deal of control over the Fund and its operations. He organized the Fund; he was the president and a trustee of the Fund; he was the Fund's investment adviser; he solicited investors to purchase shares in the Fund; and he authorized the payment of Fund expenses. He also exerted a great deal of influence over the Fund's board of trustees, including scheduling the board meetings and helping to determine the meeting agenda. Further, Bagwell participated in the preparation, review, and amendment of the Fund's Prospectuses and Statements of Additional Information ("SAIs") filed with the Commission. He also signed the Fund's registration statements filed with the Commission in his capacities as Fund president and trustee. In addition, Bagwell prepared and signed the shareholder letters that forwarded the Fund's semi-annual and annual reports to the investors.
C. From the Fund's inception in March 1996 until its liquidation in April 1999, the Fund's registration statements represented that Bagwell agreed to reimburse the Fund for certain operating expenses (e.g., accounting and legal fees) above the Fund's expense cap. Specifically, he agreed to reimburse the Fund for expenses which exceeded 2.35% of the Fund's average daily net assets before July 8, 1997, and 4% thereafter.
D. From March 1996 to April 29, 1997, Bagwell regularly paid or reimbursed the Fund for expenses above the 2.35% expense cap. Bagwell ceased reimbursing the Fund for expenses, however, after April 29, 1997. Beginning on April 30, 1997, the Fund started paying all of its expenses and accruing a receivable due from Bagwell. By June 30, 1997, the receivable represented 5% of the Fund's net assets.
E. Between August 20, 1997 and September 30, 1997, Bagwell received a series of letters from the Fund accountant stating that the receivable due from Bagwell was significant, constituted an unlawful loan, and needed to be repaid immediately. Despite these letters and frequent similar oral discussions with the Fund accountant, Bagwell did not reimburse the Fund from August 1997 to November 1997 or apprise the Fund's other trustees about such communications. By November 5, 1997, the receivable reached $36,212, which constituted approximately 9% of the Fund's net assets.
F. At the Fund's board meeting on October 29, 1997, Bagwell represented to the trustees that he would reduce the receivable with personal funds. On November 6, 1997, however, Bagwell reduced the receivable with $35,000 that he borrowed from one of the Fund's shareholders. Subsequent to this reimbursement, the receivable continued to increase. By June 30, 1998, the receivable reached $47,493, which constituted 13% of the Fund's net assets.
G. By September 30, 1998, the receivable constituted over 18% of the Fund's net assets. In October 1998, the Fund accountant informed Bagwell that if the receivable was not paid, the Fund's net asset value should be reduced. Bagwell, however, instructed the Fund accountant not to adjust the Fund's net asset value and assured the Fund's trustees that he could and would pay off the receivable.
H. At a December 1998 meeting of the Fund's trustees, Bagwell discussed his financial condition with the trustees, assured them that he was financially viable, and proposed a schedule to pay off the receivable by June 30, 1999 by making specified monthly payments to the Fund ranging from $5,000 to $20,000. In assuring the trustees of his financial viability, however, Bagwell provided them with a financial statement that misrepresented his financial condition. Further, he failed to disclose to them that he was already in default of the payment schedule because he had missed the November 1998 payment.
I. On December 31, 1998, the receivable due from Bagwell reached $83,399, which constituted 25% of the Fund's net assets. In addition, Bagwell began collecting management and administrative fees from the Fund for the three-month period ended December 31, 1998 without the knowledge of the other trustees and even though the Fund's 1998 annual report stated that he had collected no management or administrative fees. Moreover, Bagwell failed to make any payments pursuant to the payment schedule from November 1998 through February 1999.
J. For the three-month period ended March 31, 1999, Bagwell again collected management and administrative fees from the Fund. He collected these fees without the knowledge or approval of the trustees and despite the fact that the receivable comprised 23% of the Fund's net assets. Further, due to his unsound financial condition, Bagwell failed to reimburse the Fund prior to the Fund's liquidation in April 1999.
K. Between April 1997 and April 1999, the Fund made at least two sales of its shares. However, because the receivable was improperly included in the Fund's total net assets, the Fund executed these sales at incorrect net asset values.
L. On April 12, 1999, Bagwell wrote a letter to Fund shareholders stating that it would be in their best interests to immediately redeem their positions. As a result, all but one of the shareholders fully redeemed their holdings by April 16, 1999. The one remaining shareholder agreed to receive a promissory note from Bagwell for the amount of her investment.
M. Section 17(a) of the Securities Act prohibits fraud in the offer and sale of securities, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud in connection with the purchase or sale of any security. Sections 206(1) and 206(2) of the Advisers Act make it unlawful for any investment adviser to employ any device, scheme or artifice to defraud, or to engage in any transaction, practice, or course of business which operates as a fraud or deceit on any client or prospective client. Section 206(4) of the Advisers Act prohibits an investment adviser from engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative as defined and proscribed by the rules and regulations of the Commission. Rule 206(4)-4(a)(1) requires advisers with discretionary authority over client funds to disclose any financial condition that is likely to impair the ability of the adviser to meet contractual commitments to clients. Section 34(b) of the Investment Company Act makes it unlawful for any person to make untrue statements of material fact, or omit material information necessary to make other statements not misleading, in any report or document filed under the Investment Company Act.
N. From April 30, 1997 to April 16, 1999, Bagwell failed to timely and fully reimburse the Fund for expenses above the expense cap. As a result, he unlawfully borrowed up to 25% of the Fund's net assets. Moreover, Bagwell collected management and administrative fees from the Fund without the knowledge or approval of the Fund's other trustees for the quarters ended December 31, 1998 and March 31, 1999. Bagwell thus willfully violated Sections 206(1) and 206(2) of the Advisers Act.
O. As discussed above, Bagwell misrepresented to the Fund's trustees at a December 1998 board meeting that he was financially viable. Moreover, he failed to disclose to the trustees that the payment schedule approved by them was already in default because he had missed the November 1998 payment. Bagwell thus willfully violated Sections 206(1) and 206(2) of the Advisers Act.
P. The Fund's disclosure documents sent to shareholders and, in some cases, filed with the Commission also misrepresented and/or omitted material information. First, the Fund's Prospectuses and SAIs represented that the Fund's expenses would be capped at 2.35% of the Fund's average daily net assets before July 8, 1997, and 4% thereafter. The Fund's SAIs also represented that Bagwell, as the Fund's adviser, agreed to pay the expenses above the expense cap. As discussed above, Bagwell failed to timely reimburse the Fund for expenses above the expense cap. Second, the Fund's 1998 annual report misrepresented that Bagwell had reimbursed the Fund $98,639 for expenses and that he had not collected management or administrative fees from the Fund and omitted to disclose that Bagwell had no present ability to reimburse the Fund. The Fund's 1997 annual report also failed to disclose that Bagwell borrowed $35,000 to reduce the receivable and that he could not meet his obligation under the expense limitation agreement without financial assistance. Both the 1997 and 1998 annual reports failed to disclose the negative impact that the receivable, a large uninvestible asset, had on the Fund's net asset value. Third, the Fund's June 30, 1998 semi-annual report misrepresented that Bagwell had reimbursed the Fund $46,063 for expenses and failed to disclose that Bagwell had no present ability to reimburse the Fund. The Fund's June 30, 1997 semi-annual report also failed to disclose that Bagwell had no present ability to reimburse the Fund due to his unsound financial condition. Thus, Bagwell willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. Further, because each document discussed above was filed with the Commission (except for the two semi-annual reports to shareholders), Bagwell willfully violated Section 34(b) of the Investment Company Act.
Q. Bagwell was in poor financial condition from at least June 1997 until after the Fund liquidated in April 1999. Despite his poor financial condition, he repeatedly failed to disclose such material information to the Fund's other trustees. Bagwell's poor financial condition impaired his ability to reimburse the Fund for expenses above the expense cap. Bagwell thus willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-4(a)(1) thereunder.
R. Section 17(a)(3) of the Investment Company Act makes it unlawful for an affiliated person of a registered investment company to borrow money from a registered investment company.2 As the investment adviser, president, and a trustee of the Fund, Bagwell was an affiliated person of the Fund. His failure to timely reimburse the Fund constituted an unlawful borrowing of Fund assets in willful violation of Section 17(a)(3) of the Investment Company Act.
S. Section 21(b) of the Investment Company Act prohibits an investment company from making loans to any person who controls the investment company. Further, the failure to timely reimburse a fund for expenses above the fund's expense cap is the equivalent of receiving a loan from the fund. Accordingly, it was unlawful for the Fund to lend money to Bagwell, who exercised a controlling influence over the management and policies of the Fund. In this position of control, Bagwell willfully aided and abetted and caused the Fund's violation of Section 21(b) of the Investment Company Act by failing to timely reimburse the Fund.
INCORRECT NET ASSET VALUE
T. Section 22(c) of the Investment Company Act and Rule 22c-1 thereunder prohibit a registered investment company from selling, redeeming, or repurchasing its securities except at a price based on the current net asset value of such securities. Under Section 2(a)(41) of the Investment Company Act and Rule 2a-4 thereunder, current net asset value calculations must be based on current market value or (if market quotations are not readily available) fair value as determined in good faith by the board of directors. The receivable was not valued in accordance with these requirements. The Fund's shares were sold with a large uncollectible receivable included as an asset in the Fund's net asset value. Bagwell willfully aided and abetted and caused the violation of Rule 22c-1 of the Investment Company Act.
In view of the foregoing, the Commission deems it appropriate in the public interest to accept the Offer submitted by Bagwell and impose the sanctions and cease-and-desist order specified therein. In accepting the Offer, the Commission has taken into consideration Bagwell's undertaking, contained in the Offer, to promptly deregister the JWB Aggressive Growth Fund under the Investment Company Act by filing a Form N-8F with the Commission within 30 days of entry of this Order and by taking all other actions necessary to deregister the JWB Aggressive Growth Fund.
Accordingly, IT IS ORDERED that:
(1) Pursuant to Section 203(f) of the Advisers Act, and pursuant to Section 9(b) of the Investment Company Act, Bagwell is barred from association with any investment adviser and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter;
(2) Pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Section 203(k) of the Advisers Act, and Section 9(f) of the Investment Company Act, Bagwell shall cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-4(a)(1) thereunder, and Sections 17(a)(3) and 34(b) of the Investment Company Act, and from causing any violation and any future violation of Section 21(b) and Rule 22c-1 of the Investment Company Act; and
(3) Pursuant to Section 203(i) of the Advisers Act and Section 9(d) of the Investment Company Act, Bagwell shall pay, within 30 days of the entry of this Order, a civil money penalty in the amount of $10,000 to the United States Treasury. 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, Virginia 22312-0003; and (D) submitted under a cover letter that identifies Bagwell as a Respondent in these proceedings, and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Adam Schneir, Attorney, Pacific Regional Office, Securities and Exchange Commission, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036.
By the Commission.
1 The findings herein are not binding on anyone other than Respondent.
2 See In re Vector Index Advisors, Inc., Advisers Act Release No. 1569 (July 8, 1996).