UNITED STATES OF AMERICA
SECURITIES ACT OF 1933
SECURITIES EXCHANGE ACT OF 1934
INVESTMENT ADVISERS ACT OF 1940
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Section 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), against Valentin L. Manglapus, II ("Manglapus" or "Respondent").
In anticipation of the institution of this administrative proceeding, Manglapus has submitted an Offer of Settlement ("Offer") which the Commission has determined is in the public interest to accept. Solely for the purpose of these proceedings and any other proceedings 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 contained in this Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act, Sections 15(b) and 21C of the Exchange Act, and Section 203(k) of the Advisers Act, Making Findings, Imposing Remedial Sanctions, and Issuing Cease-and-Desist Order ("Order"), except as to Paragraph III.A., which is admitted, Manglapus consents to the issuance of this Order.
On the basis of this Order and the Offer, the Commission finds1 the following:
A. Manglapus, age 52, was, at all relevant times, a registered representative of a broker-dealer registered with the Commission. Manglapus was also, at all relevant times, the registered representative for the brokerage accounts of Teresa V. Fernandez' ("Fernandez") advisory clients ("the Clients"). Each time Manglapus changed firms, the Fernandez-managed brokerage accounts moved with him.2
Other Relevant Entity and Person
B. Fernandez served as an investment adviser, in her own name and through Wharton Investments Inc. ("Wharton"), from at least 1980 through 1995. Fernandez was the founder, president, owner, and sole employee of Wharton, which she operated out of her home in Tenafly, New Jersey. In connection with the fraudulent scheme described in Paragraphs D. through Q. below, on November 19, 1996, Fernandez pleaded guilty to three counts of mail fraud. U.S. v. Teresa Fernandez, 96 Cr. 678 (S.D.N.Y). Fernandez is Manglapus's cousin.
C. Wharton, a New Jersey corporation, was solely owned by Fernandez. Wharton registered as an investment adviser with the Commission on November 1, 1985. Wharton's registration was canceled by the Commission on February 10, 1995 for failure to file periodic reports. Wharton was dissolved in June 1995.
D. In the early 1980s, Fernandez employed an index option trading strategy that generated significant returns for the Clients. Beginning in the fourth quarter of 1983, however, Fernandez's options strategy produced significant losses in the Clients' accounts. Although Fernandez ultimately abandoned her options strategy, the Clients' accounts continued to incur losses.
E. From at least the fourth quarter of 1983 through September 1995, in order to conceal the losses in the Clients' accounts, Fernandez routinely made false and misleading statements to the Clients concerning, among other things, the past and ongoing profitability of the advisory accounts and the net equity in the advisory accounts. In addition, from at least December 1986 through September 1995, to conceal the losses, Fernandez misappropriated Client funds. On occasion, certain Clients (unaware of the actual losses in their accounts) requested withdrawals of amounts in excess of the actual equity in their accounts. To conceal the true status of the requesting Clients' accounts, Fernandez misappropriated funds from other Clients' accounts to meet the withdrawal requests. From March 1985 through September 1995, Fernandez misappropriated millions of dollars of certain Client' funds and concealed the misappropriations by sending such Clients false statements concerning their accounts. Fernandez also improperly charged certain of the Clients approximately $1.5 million in advisory fees. Finally, Fernandez violated certain custody provisions under the Advisers Act.
F. On November 19, 1996, the Commission filed a complaint against Fernandez in the United States District Court for the Southern District of New York and charged her with misappropriating at least $64,036,612 of the Clients' funds. On November 21, 1996, Fernandez was permanently enjoined by consent, without admitting or denying the allegations in the Commission's complaint, from violating the antifraud provisions of the Securities, Exchange, and Advisers Acts and the custody rules under the Advisers Act. On August 21, 1997, the Commission entered an Order pursuant to an offer of settlement which barred Fernandez from association with any broker, dealer, investment adviser, investment company or municipal securities dealer. Teresa V. Fernandez, Advisers Act Release No. 1650 (August 21, 1997).
Manglapus's Role in Fernandez's Scheme
G. In the early 1980s, Manglapus learned about the significant returns that Fernandez had been generating with her options trading strategy. As word of the success of Fernandez's options strategy spread, various individuals, mostly wealthy Philippine nationals, several of whom were relativesof Manglapus and Fernandez, opened accounts to be managed by Fernandez at the broker-dealer where Manglapus worked. Manglapus was the registered representative for these accounts and received the commissions generated by the trading activity. Fernandez was the investment adviser and directed all transactions in the Clients' accounts. Fernandez received the monthly broker-dealer statements for many of the Clients because they did not want to receive mail in the Philippines from United States financial institutions. Each quarter, Fernandez sent those Clients the broker-dealer statements and a report she prepared showing the performance and balance of the account for the quarter (the "quarterly advisory statement"). For certain Clients, Fernandez sent only the quarterly advisory statements. Manglapus knew that certain Clients received information concerning the activity in their accounts only from or through Fernandez, and not directly from the broker-dealer.
The Concealment of Losses in Clients' Accounts
H. During the fourth quarter of 1983, the accounts Fernandez was then managing suffered significant losses. In order to prevent the Clients from discovering the true status of their accounts, Fernandez began to send the Clients quarterly advisory statements that falsely represented the performance and balance in their accounts. These statements not only failed to show the losses the Clients' accounts had incurred, but falsely showed that the accounts had been profitable during the quarter. Fernandez continued this practice through September 1995. In addition, on occasion, Fernandez doctored the brokerage statements for clients to whom she sent brokerage statements in order to conceal the true status of the accounts.
I. In December 1984, Manglapus moved to Broker-Dealer A, bringing the Fernandez-managed accounts with him.
J. At some point after the fourth quarter of 1983, the format of the monthly broker-dealer statements for the Clients' accounts changed. The new format made the balance in the account much more prominent than it had been with the old format. Prior to the change, Manglapus informed Fernandez of the change and sent her an example of the new format. Thereafter and continuing through September 1995, Fernandez created fake brokerage statements which she sent to certain Clients. (Previously, the statements for the Clients who had been receiving their monthly statements directly from the broker-dealer had been diverted by designating Fernandez's home address as the address of record for those Clients' accounts.) Fernandez sent the fake statements to some of the Clients in the relevant broker-dealer's envelopes.
K. From at least December 1986 through September 1995, Manglapus had conversations with certain of the Clients concerning their accounts. Although Manglapus was aware that some of the Clients had sustained losses in their accounts during certain periods of time and that Fernandez was the Clients' only source of information regarding the activity in their accounts, he failed to discuss the losses with the Clients during these conversations.
The Concealment of Unauthorized Transfers from Clients' Accounts
L. Beginning in March 1985, Fernandez received withdrawal requests from Clients for which there were insufficient funds in the Clients' accounts. Manglapus was aware of some of these requests. By means of forged letters of authorization and otherwise, Fernandez arranged to transfer the money from a second Client's account to the account of the Client requesting the withdrawal. From March 1985 through September 1995, Fernandez transferred millions of dollars of certain Clients' funds to meet withdrawal requests of other Clients.
M. In May or June 1990, Manglapus, directly or indirectly, informed Fernandez that Broker-Dealer A required written client authorization for transfers of funds from client accounts to accounts with different beneficial owners. This conversation prompted Fernandez to open bank accounts in the names of certain of the Clients, without such Clients' knowledge or authorization. Thereafter, when Fernandez wished to transfer funds between Clients, she arranged to transfer money from the Clients' accounts at Broker-Dealer A to the bank accounts she had established in their names. Fernandez then caused the money from the bank accounts to be transferred into the brokerage account of the Client that had requested funds, or directly to a bank account of the requesting Client.
N. Although Manglapus knew that Fernandez had effected numerous transfers of Client funds, Manglapus failed to mention the transfers in any of his conversations with any of the Clients.
O. As a result of his activities relating to the Clients' accounts, Manglapus received over $1.8 million in net commissions on transactions in the defrauded Clients' accounts.
The Concealment of Fernandez's Inflated Performance Fees
P. The advisory agreements between Fernandez and the Clients provided that Fernandez's advisory fee was dependent on the profitability of the Clients' accounts. Under the terms of those agreements, if the profits in a particular account, on a quarterly basis, exceeded a designated amount, Fernandez would receive a percentage of the profits. If the accounts lost money, or if the profits in the account were less than the designated amount, Fernandez would receive no compensation for her management of the accounts during that quarter.
Q. During the period of the fraudulent scheme, Fernandez failed to achieve sufficient profits in the Clients' accounts to entitle her to receive advisory fees, under the terms of the advisory agreement. Notwithstanding this failure, Fernandez often submitted Client authorizations to pay advisory fees. The amounts Fernandez requested to be paid were usually based on the false performance figures in the quarterly advisory statements that she was sending to Clients. Fernandez fraudulently obtained at least $1,500,568 in purported performance fees in this manner. Manglapus knew or recklessly disregarded that Fernandez was receiving fees, and failed to discuss those fees with Clients.
The Churning Account -- Manglapus Engaged in Excessive Transactions
R. In May 1989, while Manglapus was associated with Broker-Dealer B, an account was opened in the name of one of the Clients and funded with an unauthorized transfer of $300,000 from an existing account of the Client with the same broker-dealer.
S. The address of record for the new account was Fernandez's address, and transaction confirmations and monthly broker-dealer statements for the account were directed to Fernandez.
T. Manglapus executed excessive transactions in the account. Between May 1989 and April 1990, the average equity in the account was approximately $145,676. During this same period, Manglapus made purchases for the account totaling $7,313,844, resulting in a turnover ratio of approximately 50. These transactions generated $103,585 in net commissions for Manglapus.
U. From at least December 1986 through September 1995, Manglapus, by his activities described in Paragraphs D through Q above, willfully aided and abetted violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), (2), and (4) of the Advisers Act, and Rule 206(4)-2 thereunder.
V. From at least May 1989 through at least April 1990, Manglapus, by his activities described in Paragraphs R through T above, willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Demonstrated Inability to Pay
W. Manglapus has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement, prejudgment interest, or a civil penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Manglapus and has determined that Manglapus does not have the financial ability to pay disgorgement, prejudgment interest, or a civil penalty.
In view of the foregoing, the Commission deems it appropriate and finds that it is in the public interest to accept Manglapus's Offer of Settlement and impose the remedial sanctions set forth below.
Accordingly, IT IS ORDERED that:
A. Manglapus cease and desist from committing or causing any violation and any futureviolation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule l0b-5 thereunder, and Sections 206(1), (2) and (4) of the Advisers Act and Rule 206(4)-2 thereunder.
B. Manglapus be barred from association with any broker or dealer.
C. Manglapus pay disgorgement in the amount of $1,942,504.78 plus prejudgment interest thereon provided, however, that the payment of disgorgement and prejudgement interest is waived based upon Manglapus' demonstrated inability to pay.
D. The Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Manglapus provided accurate and complete financial information at the time such representations were made; (2) determine the amount of disgorgement plus prejudgment interest to be paid and the civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Manglapus's Offer of Settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Manglapus was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of disgorgement plus prejudgment interest to be paid and the civil penalty to be imposed and whether any additional remedies should be imposed. Manglapus may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceedings.
By the Commission.
1 The findings contained herein are made pursuant to Manglapus's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 Manglapus was associated with one broker-dealer ("Broker-Dealer A") from December 1984 through August 1987 and from May 1990 through May 1996. From August 1987 until May 1990, Manglapus was associated with a different broker-dealer ("Broker-Dealer B"). Prior to December 1984, Manglapus was associated with several other broker-dealers.