UNITED STATES OF AMERICA
In the Matter of
Pryor, McClendon, Counts & Co., Inc.,
|Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order Against Pryor, McClendon, Counts & Co., Inc., n/k/a Pryor, Counts & Co., Inc.|
On April 29, 1999, the Commission instituted public administrative proceedings against Pryor, McClendon, Counts & Co., Inc., now known as Pryor, Counts & Co., Inc. (PMC) pursuant to section 8A of the Securities Act of 1933 (Securities Act) and sections 15(b)(4) and 21C of the Securities Exchange Act of 1934 (Exchange Act).
PMC has submitted an offer of settlement, which the Commission has determined 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, and without admitting or denying the findings contained in this order (except that PMC admits that the Commission has jurisdiction over it and over the subject matter of these proceedings), PMC consents to the entry of the findings and the institution of the remedial sanctions and the cease-and-desist order set forth below.
The Commission finds the following:1
PMC, a New York corporation headquartered in Philadelphia, Pennsylvania, is a broker-dealer registered with the Commission pursuant to section 15(b) of the Exchange Act.
This matter concerns a series of federal securities law violations by PMC and two of its principals, and others scheming with them. The first group of violations relates to PMC's handling of the city of Atlanta's portfolio of zero-coupon securities issued by the United States Treasury ("Separate Trading of Registered Interest and Principal Securities" or "STRIPS"). The second group of violations concerns a series of concealed payments and political contributions to public officials and candidates for public office in Atlanta and New York.
As to the violations in Atlanta: From at least March 1992 through April 1994, PMC and others participated in a scheme to defraud the city of Atlanta in connection with the city's purchase and sale of approximately $9.8 billion in STRIPS. Atlanta's investment officer secretly set aside for PMC virtually all of the city's STRIPS business, at a time when PMC was providing substantial, undisclosed monetary benefits to the investment officer and her husband. PMC and the investment officer also churned Atlanta's STRIPS portfolio, generating over $15.3 million in revenue for PMC. Separate from but during part of the same period as the STRIPS trading scheme, PMC also made secret payments totaling $135,000 to an official with the city of Atlanta. At the time of the payments, PMC was seeking and obtaining municipal securities business from the City of Atlanta. (There is no evidence, however, that the official actually influenced the city's selection of underwriters.) By engaging in these activities, PMC violated the antifraud and books and records provisions of the federal securities laws as well as the Municipal Securities Rulemaking Board (MSRB) rule requiring fair dealing (rule G-17).
As to the violations in New York: PMC funneled political contributions through conduits to the campaign organization of a New York City official in May 1994 and a candidate for New York City office in July 1997. After each of these contributions, PMC participated in New York City negotiated bond offerings in violation of the MSRB rules prohibiting pay-to-play (rule G-37) and requiring fair dealing (rule G-17). One month after the 1994 contribution, PMC also violated the antifraud provisions of the federal securities laws by falsely representing to New York City that PMC's employees had made no contributions that would trigger the two-year underwriting ban of rule G-37. Finally, PMC mischaracterized as consulting expenses in its books and records the 1994 and 1997 campaign contributions, as well as a campaign contribution in 1993 to a candidate for New York state office and a payment in 1992 to a New York state official.
3. STRIPS Trading with the City of Atlanta
a. Atlanta's STRIPS Business
From March 1992 to April 1994, the value of Atlanta's securities portfolio ranged from approximately $1 billion to $1.4 billion, with approximately 40 percent to 60 percent of the portfolio consisting of STRIPS. During this period, PMC engaged in approximately $9.8 billion in STRIPS purchases and sales with Atlanta. The city's STRIPS transactions with PMC accounted for approximately 92 percent of the dollar amount of all STRIPS purchased and sold by Atlanta. All or nearly all of Atlanta's STRIPS transactions with PMC were done at the firm's recommendation.
b. Atlanta's Investment Officer Directs
the City's STRIPS Business to PMC
During the relevant period, Atlanta maintained a list of broker-dealers with whom it could engage in securities transactions. On a monthly basis, the city mailed to those broker-dealers a report known as a "swap report." The purpose of the swap report was to inform the broker-dealers of Atlanta's securities holdings so that they could propose securities transactions beneficial to the city. The city's investment officer was responsible for evaluating whether securities transactions proposed by a broker-dealer enhanced the city's portfolio, as well as for buying and selling securities for Atlanta's portfolio.
At some point prior to March 1992, at a time when PMC had sold a substantial amount of STRIPS to Atlanta, the investment officer instructed her assistant to delete from the swap report all references to STRIPS before mailing the swap report to broker-dealers each month. Thereafter, the city's STRIPS did not appear on the swap report mailed to broker-dealers; this virtually eliminated PMC's competition for Atlanta's STRIPS business. However, PMC regularly received an internal city report known as a "security recall report," which showed all of the securities in Atlanta's portfolio. No other broker-dealer received the security recall report. And, with the exception of broker-dealers affiliated with banks where the city safe-kept its securities, no other broker-dealer besides PMC knew of the city's substantial holdings of STRIPS.2
c. PMC Provides Undisclosed Benefits to Atlanta's
Investment Officer and Her Husband
Beginning no later than March of 1992, PMC began to provide financial benefits to the city's investment officer and her husband. In March 1992, PMC funneled through a conduit $30,000 to the investment officer's husband. The investment officer's husband used some of that money to capitalize, and set up office space for, his newly-formed company. From May 1992 until April 1994, PMC subcontracted with the company owned by the investment officer's husband, and paid the company $286,560 for services, $31,044 for expenses, and another $7,642 not designated as one or the other. PMC's payments to the company accounted for nearly all of the company's revenue during that period. In addition to that revenue and the $30,000 payment, PMC gave the investment officer and her husband other gifts of value. Neither PMC nor the investment officer ever disclosed, and the city never learned of, the financial and other benefits that the investment officer and her husband received from PMC.
d. PMC Trading in the City's STRIPS
PMC with others compounded the benefits that the firm received from the STRIPS business set aside for it by engaging in a course of trading that was excessive, improper, and inconsistent with the city's investment objectives, but designed to generate compensation for PMC in the form of markups and markdowns.3 The city's stated investment policy was to pursue "a prudent, yet aggressive investment policy of maximizing investment income while minimizing risk" and to "hold investments until maturity." Yet from March 1992 until February 1994, PMC together with the investment officer caused Atlanta to engage in transactions with PMC that, in the aggregate, neither enhanced the value of the portfolio nor achieved the city's objectives, but instead turned over the STRIPS portion of the city's portfolio 8.6 times (or annually 4.5 times).
PMC caused the city to effect frequent exchanges, or "swaps," of one STRIPS for another STRIPS with a longer or shorter maturity. Generally, these series of STRIPS-for-STRIPS exchanges merely increased, then decreased, back and forth, the maturities of the STRIPS within a narrow range of short-term maturities. That course of trading provided PMC with at least $15,301,017 in revenues from markups and markdowns charged on the STRIPS transactions. The trading, however, provided no benefit to Atlanta, but instead materially diminished the city's investment returns, essentially through unnecessary transaction costs in the form of markups and markdowns received by PMC.4
4. Concealed Payments and Contributions
a. PMC Uses the Conduit to Make Payments
to an Official of the City of Atlanta
Separate from but during the same period as the STRIPS trading scheme, PMC made secret payments to an official of the city of Atlanta. From December 1992 to August 1993, PMC funneled $135,000 to the Atlanta official through a company owned by the same conduit PMC used to funnel money to the husband of Atlanta's investment officer. PMC made the payments in four installments, recorded as professional fees paid to the conduit's company. With each of the four installments, PMC made a payment to the conduit's company, which, in turn, made an identical or similar payment close in time to the official's firm. During the period of the payments, PMC pursued and obtained underwriting business from Atlanta. (There is no evidence, however, that the official actually influenced the selection of underwriters by the city.)
b. Concealed Political Contributions
after Rule G-37 took Effect
In the early 1990's, New York City selected a slate of underwriters to underwrite all of its negotiated bond offerings during a two-year period. In May 1994, while PMC was a member of the existing slate but shortly before the selection of underwriters for the next two-year slate, PMC funneled, through the same conduit that PMC used in Atlanta, a $10,000 contribution to the campaign organization of an official of New York City. On May 20, 1994, a PMC principal drew a $10,000 "loan" from PMC and wrote a personal check to the conduit for $10,400. On or about that same date, the conduit deposited that check into his personal checking account, and wrote a $10,000 check to the official's campaign organization.
Approximately one month after making the $10,000 contribution, PMC submitted a proposal to serve as an underwriter for the city's negotiated underwritings for the next two years. The proposal, submitted with a cover letter signed by a PMC principal, addressed conflict-of-interest questions that New York City had posed in its request for proposals. Notwithstanding the $10,000 contribution, PMC's proposal stated that:
In light of the recent action of the MSRB and the SEC in promulgating MSRB Rule G-37 which is founded upon conflict of interest concepts, PMC wishes to advise you of certain facts regarding political contributions. Prior to adopting a voluntary ban on all political contributions in December 1993, PMC did contribute to the election campaigns of a number of state and local New York political figures. In December 1993, however, PMC adopted a voluntary ban prohibiting all firm employees from making political contributions at the state and local levels and from soliciting contributions from outside parties. This voluntary ban remains in effect.
Following the submission of PMC's proposal, New York City selected PMC to serve on the city's slate of underwriters for negotiated bond offerings for the next two years. Between July 1994 and March 1996, PMC served as a co-manager or co-senior manager on more than $8.3 billion in New York City negotiated underwritings.
Three years later, a PMC principal made $750 in contributions, before the primaries, to a candidate for New York City office by way of three money orders made to appear as if they were from persons other than the PMC principal. In early July 1997, the PMC principal gave his administrative assistant $750 in cash, told her to purchase three separate money orders, and told her to make them payable for $250 each to the candidate's campaign. The PMC principal instructed his assistant to make out one of the money orders as if it were from the assistant herself, and to make out the other two as if they were from the wife of a PMC employee and a friend of the PMC principal. The PMC principal then caused those money orders to be delivered to the candidate's campaign together with the PMC principal's own personal check for $250. Within a week, the campaign returned (undeposited) two of the money orders (the money orders in the assistant's name and in the PMC principal's friend's name). The PMC principal instructed his assistant to deposit the returned $500 into PMC's bank account, which she did. In the 21 months thereafter, PMC participated as a co-managing underwriter in more than $4 billion of New York City negotiated bond offerings.
In total, PMC received between approximately $270,000 to $300,000 in management and other fees for serving as co-senior manager and co-manager on New York City negotiated bond offerings during the two-year periods immediately following the 1994 and 1997 contributions.
c. PMC Makes Secret Payment to a New York State
Official and Concealed Political Contribution
to a Candidate for New York State Office
Finally, PMC failed to keep accurate books and records in connection with the 1994 and 1997 campaign contributions described above, as well as two other payments made through the conduit mentioned above. In September 1992, PMC wrote a $12,000 check to the conduit, which was mischaracterized on the firm's books and records as a "consulting expense." On the same day and from the same account in which the PMC check was deposited, the conduit wrote a $12,000 check to a New York state official.
The following year, in April 1993, PMC funneled a $2,000 contribution through the conduit to the campaign organization for a candidate for New York state office. The PMC principal wrote a PMC check for $2,000 to the conduit, dated April 29, 1993, with the misleading notation, "house repair." The following day, the conduit deposited the check into his personal bank account. By check dated April 29, 1993, the conduit's company made a $2,000 contribution to the candidate's campaign organization. Again, PMC mischaracterized the payment in its books and records as a "consulting expense."
B. LEGAL ANALYSIS
1. Violations Related to the City of Atlanta's STRIPS Transactions
Section 10(b) of the Exchange Act and rule 10b-5 thereunder prohibit the use of schemes, practices or courses of business that operate as frauds, or the making of material misrepresentations or omissions, with scienter, in connection with the purchase or sale of securities. Section 17(a) of the Securities Act prohibits similar conduct in the offer or sale of securities, but under certain circumstances does not require a showing of scienter. Both knowing and reckless conduct establishes scienter. Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir. 1978), cert. denied, 439 U.S. 1039 (1978).
PMC and others participated in a scheme to defraud the city of Atlanta in connection with the city's purchase and sale of securities.5 Atlanta's investment officer set aside substantial securities business for PMC, and funneled virtually all of the city's STRIPS business to PMC, at a time when the firm was providing substantial monetary benefits to the investment officer and her husband. Both PMC and the investment officer concealed the elements of the scheme from Atlanta. As a result of the scheme, and through PMC's and the investment officer's joint control of Atlanta's portfolio, PMC was able to engage in excessive STRIPS trading in Atlanta's portfolio, harming the city and generating over $15.3 million in revenue for PMC. PMC therefore violated section 10(b) of the Exchange Act, rule 10b-5, and section 17(a) of the Securities Act.
a. PMC's Failure to Disclose Material Information to Atlanta
PMC violated its duty as a broker-dealer to deal fairly with its client, consistent with industry practice. The violation occurred when PMC failed to disclose the actual and potential conflicts of interest it created by its business and financial relationship with the investment officer and her husband.6 The Commission has held that a broker-dealer has a duty to disclose to its customer information indicating that the customer's agent is engaged in fraud with respect to the customer's investments.7 In failing to make that disclosure, the broker-dealer shares in the agent's liability to the customer with respect to any transactions involving the broker-dealer. Id. This duty is clearest when the broker-dealer's own relationship with the customer's agent is the cause of the agent's faithlessness.8
PMC was required to disclose to Atlanta all material facts concerning its business and financial relationship with the investment officer and her husband. These facts included that the firm had (1) an ongoing business and financial relationship with the investment officer's husband, (2) provided the investment officer's husband with $30,000 to start his business, and (3) provided the investment officer and her husband with valuable gifts.9
b. Churning of the Atlanta STRIPS Portfolio
Having obtained virtually all of Atlanta's STRIPS business during the period of the scheme, PMC with others then churned the STRIPS portion of Atlanta's portfolio. Churning refers to excessive turnover in a controlled securities account for the purpose of increasing the amount of compensation received by a broker-dealer. See, e.g., Armstrong v. McAlpin, 699 F.2d 79, 90 (2d Cir. 1983). Proof of churning requires a showing (1) that the churner had either explicit or de facto control over trading in the account, (2) that trading in the account was excessive in light of the investor's objectives, and (3) that the churner acted with scienter. See, e.g., Miley v. Oppenheimer & Co., 637 F.2d 318, 324 (5th Cir. 1981); In re Donald A. Roche, Exchange Act Rel. No. 38741 (June 16, 1997), 64 SEC Dkt. 2042, 2048.
First, PMC shared control of Atlanta's securities accounts by engaging in a scheme to defraud Atlanta with the city's investment officer-the city employee with authority to trade Atlanta's securities portfolio. That shared control rendered PMC liable for purposes of churning analysis. 10
Second, PMC with others turned over the STRIPS portion of Atlanta's portfolio at an annual rate of approximately 4.5. Excessive trading under the securities laws is not measured against some "magical per annum percentage" that establishes per se excessiveness. In re Gerald E. Donnelly, Exchange Act Rel. No. 36690 (Jan. 5, 1996), 61 SEC Dkt. 47, 51. Instead, excessive trading is determined based on the investment objectives of the customer.11 The turnover of Atlanta's STRIPS portfolio exceeded the city's investment objectives and was inconsistent with the city's stated policy of "maximizing investment income while minimizing risk" and holding "investments until maturity." PMC's frequent selling, then re-buying, of STRIPS back and forth within a narrow range of short-term maturities provided no benefit to Atlanta but instead diminished the city's investment returns. See In re Russell Irish, 42 S.E.C. 735, 736 (1965) (churning found in frequent switching back and forth between mutual funds or between different series in the same mutual fund). While harming the city, the trading enriched PMC, generating over $15.3 million in revenue for the firm.
Third, PMC knew or was reckless in not knowing that the turnover it, with others, caused of Atlanta's STRIPS was inconsistent with the city's investment objectives, provided no benefit to Atlanta, and generated revenue for the firm at Atlanta's expense by diminishing the city's investment returns.
2. Violations Concerning Concealed Payments and Contributions
By violating the MSRB rules discussed below, PMC violated section 15B(c)(1) of the Exchange Act.12
a. Concealed Payments to Atlanta City Official
PMC's undisclosed payments to the city of Atlanta official at a time when the firm was seeking and obtaining municipal underwriting business from Atlanta created an actual or potential conflict of interest for the firm.13 PMC's failure to disclose to Atlanta the payments, and the actual or potential conflicts created thereby, violated MSRB rule G-17. Id.14
b. Concealed $10,000 Contribution to New York City Official
Likewise, PMC violated MSRB rule G-17 by funneling the $10,000 contribution through a conduit to the New York City official at a time when the firm was seeking and obtaining municipal underwriting business from the city. The firm also violated MSRB rule G-37 because of the amount of the contribution and concealed manner in which it was made.15
The $10,000 contribution triggered rule G-37(b)'s ban forbidding PMC from underwriting New York City negotiated bond issues for two years.16 By underwriting New York City negotiated bond offerings during the two years after the contribution, PMC violated MSRB rule G-37(b). By using the conduit to make the contribution, PMC also violated MSRB
rule G-37(d), which prohibits broker-dealers from violating rule G-37(b) through other persons or entities.17 Finally, PMC violated rule G-37(e) by failing to disclose the contribution in its quarterly report to the MSRB.
PMC also violated the antifraud provisions of the federal securities laws in connection with the $10,000 contribution. When addressing conflict-of-interest questions posed by New York City, PMC wrote that since December 1993 the firm and its employees had in effect a voluntary ban on employees' political contributions to state and local officials. In the context in which those statements were made, PMC's failure to disclose the $10,000 contribution was misleading. Under the circumstances, materiality lies in the fact that the contribution had the effect of statutorily barring PMC from underwriting the city's negotiated bond offerings for two years, something a reasonable issuer would have wanted to know when selecting underwriters. The misrepresentation sufficiently touched on the sale of New York City's securities to satisfy the "in connection with" requirement of section 10(b) of the Exchange Act and rule 10b-5, because the misrepresentation bore directly on the city's decision concerning to whom it would sell its securities.18 Finally, PMC knew or was reckless in not knowing that the funneled payment and its failure to disclose it operated as a fraud or deceit on the city.
c. Concealed Contributions to Candidate for New York City Office
In July 1997, PMC again violated MSRB rules G-17 and G-37 by making secret contributions to the campaign of a candidate for New York City office by way of three money orders in other persons' names. As a resident of New York City, rule G-37 allowed the PMC principal to contribute $250 to the candidate's campaign in the primary and in the general election, for a total of $500 during the election cycle. However, rule G-37 limits contributions to $250 before the primary, with an additional $250 allowed after the primary for the general election. MSRB Interpretations, published in MSRB Manual (CCH) ¶ 3681, at 5455 (April 1997). The PMC principal exceeded the $250 limit for the primary by making a $250 contribution with a personal check and making $750 in contributions through money orders made to appear as if they were from other people.19 This triggered the two-year ban of rule G-37. But again PMC participated in underwriting New York City negotiated bond offerings. As a result, PMC violated MSRB rule G-37(b). The ban was triggered, and the violations occurred, even though the candidate subsequently lost the election.20
When PMC delivered three money orders to the campaign along with the PMC principal's own check, PMC also violated MSRB rule G-37(c) by coordinating contributions during a period when PMC was engaged in municipal securities business with New York City.21 Finally, PMC failed to disclose the $750 in contributions in its quarterly report to the MSRB, and thereby also violated MSRB rule G-37(e).22
d. Violations of Books and Records Provisions
PMC, as a registered broker-dealer, was required by section 17(a)(1) of the Exchange Act and the rules promulgated thereunder to create and maintain books and records that accurately reflect its operations and dealings. Pursuant to section 17(a) and rule 17a-3 promulgated thereunder, PMC was required, among other things, to maintain ledgers or other records accurately reflecting all expense accounts.23 Deliberate falsification of such records violates the Exchange Act's recordkeeping provisions. In re James F. Novak, Exchange Act Rel. No. 19660 (Apr. 8, 1983), 27 SEC Dkt. 1078, 1083.
PMC was also subject to MSRB recordkeeping requirements. MSRB rule G-8 sets out books and records requirements that parallel the Commission's, requiring broker-dealers to maintain, "clearly and accurately," specified books and records concerning their municipal securities business. Moreover, PMC was required by MSRB rule G-8(a)(xvi)(F) to maintain records reflecting all direct or indirect contributions to any official of a municipal bond issuer made by the firm's municipal finance professionals or executive officers.
PMC created and maintained inaccurate books and records with respect to the payments funneled through the conduit to the Atlanta investment officer's husband, an official of the city of Atlanta, a New York state official, and a candidate for New York State office. With respect to
each of those funneled payments, PMC's books and records failed to record the true nature of the payments and characterized them in a misleading manner in violation of Exchange Act section 17(a) and rule 17a-3(a)(2) thereunder, and MSRB rule G-8(a)(x). In addition, PMC failed to make accurate records of the contributions he made to an official of New York City and a candidate for New York City office, in violation of MSRB rule G-8(a)(xvi)(F).
Based on the foregoing, the Commission finds that:
PMC willfully violated section 17(a) of the Securities Act, sections 10(b), 15B(c)(1), and 17(a)(1) of the Exchange Act and rules 10b-5 and 17a-3 thereunder, and MSRB rules G-8, G-17, and G-37.
In view of the foregoing, the Commission finds that it is appropriate and in the public interest to impose the relief agreed to in the offer of settlement of PMC.
Accordingly, pursuant to section 8A of the Securities Act and sections 15(b)(4), 21B, and 21C of the Exchange Act:
1. IT IS ORDERED that PMC be, and hereby is, censured.
2. IT IS FURTHER ORDERED that PMC cease and desist from committing or causing any violations, and any future violations, of section 17(a) of the Securities Act, sections 10(b), 15B(c)(1), and 17(a)(1) of the Exchange Act and rules 10b-5 and 17a-3 thereunder, and MSRB rules G-8, G-17, and G-37.
3. IT IS FURTHER ORDERED that PMC shall pay a civil penalty of $40,000 to be paid within thirty days of the entry of this order.24 Payment shall be: (1) made by United States postal money order, certified check, bank cashier's check, or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted with a
cover letter that identifies PMC as a respondent in these proceedings, and the file number of these proceedings. Copies of each cover letter and money order or check shall be sent to Russell Ryan, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549-0806.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to the offer of settlement of PMC and are not binding on any other person or entity in these or any other proceedings.|
|2||Despite the investment officer's concealment, broker-dealers other than PMC managed to do limited STRIPS business with the city because on occasion the investment officer either sold STRIPS through a dealer other than PMC or a dealer proposed swaps in which it sold STRIPS to the city. After doing one of the latter transactions, the dealer involved then knew that the city owned those particular STRIPS and could then propose subsequent swaps involving those STRIPS.|
|3|| When a broker-dealer acts as a principal rather than an agent in a securities transaction with a customer, instead of charging a commission, the broker-dealer receives compensation (1) by adding a markup to the prevailing wholesale market price of the security in a sale to the customer and (2) by subtracting a markdown from the prevailing wholesale market price in a purchase from the customer. In re Lehman Bros. Inc., Exchange Act Release No. 37673 (Sept. 12, 1996), 62 SEC Dkt. 2324, 2330.
4 For example, on March 12, 1993, Atlanta's general pension fund held STRIPS that had a market value that day of $27,389,030 and matured in May 1994. Through a series of STRIPS-for-STRIPS exchanges, PMC caused the city to turn that investment over six times in 194 days, while adding $105 in new money to the investment. At the end of that period, on September 22, 1993, the city held STRIPS that matured in February 1995 and had a market value of $27,525,520. Atlanta received $136,385 in total return from these exchanges, which translates into an annual rate of return of less than 1 percent. However, to effect this series of swaps, Atlanta paid transaction costs to PMC (in the form of markups and markdowns) totaling $491,776-more than 3½ times the city's total return from those swaps.
|5||A corporation, such as PMC, is liable for the acts of its principals when the conduct is carried out on behalf of the company. See Kerbs v. Fall River Industries, Inc., 502 F.2d 731, 741 (10th Cir. 1974) (corporation liable for securities fraud committed by its president); see also In re Lazard Frères & Co. LLC, Exchange Act Rel. No. 39388 (Dec. 3, 1997), 65 SEC Dkt. 3004, 3012 & n.7 (scienter of firm's principals imputed to firm).|
|6||See SEC v. Feminella, 947 F. Supp. 722, 732 (S.D.N.Y. 1996) (broker's failure to disclose to customer that portion of consideration paid by customer included money that broker intended to provide to customer's agent); cf. SEC v. Scott, 565 F. Supp. 1513, 1527 (S.D.N.Y. 1983) (investor would consider apparent kickback agreement between issuer and underwriter material because the agreement raises inherent conflicts of interest and undermines the independence of the underwriter's investment judgment).|
|7||See In re Moore and Co., 32 S.E.C. 191, 196 (1951) (broker effecting transactions directed by customer's agent without disclosing to customer facts known to broker about agent's self-dealing "was guilty along with [agent] of violations of the antifraud provisions"); In re William I. Hay, 19 S.E.C. 397, 407 (1945) (broker effecting transactions directed by customer's agent without disclosing to customer facts known to broker about agent's self-dealing violated antifraud provisions; noting that customers were victimized by "two agents, one with discretionary power over their accounts acting faithlessly and the other, a broker, knowing of the faithlessness yet claiming to be free of any duties").|
|8|| See also In re Thomas D. Pixley, Exchange Act Rel. No. 27316 (Sept. 29, 1989), 44 SEC Dkt. 1462, 1463 (registered representative who schemed with another to influence directing of pension fund investment business to the registered representative violated section 10(b) of the Exchange Act and rule 10b-5); In re E.H. Rollins & Sons, Inc., 18 S.E.C. 347, 385-86 (1945) (broker that provided secret payments to fund fiduciary who provided fund investment business to the broker violated section 17(a) of the Securities Act).
9 Georgia law also imposed on PMC a duty to disclose to Atlanta its dealings with the investment officer. See O.C.G.A. § 23-2-53 (1996) ("Suppression of a material fact which a party is under an obligation to communicate constitutes fraud. The obligation to communicate may arise from the confidential relations of the parties or from the particular circumstances of the case."); Thompson v. Smith Barney, Harris Upham & Co., 539 F. Supp. 859, 864 (N.D. Ga. 1982) (duty to disclose under Georgia law arises "even absent a fiduciary relationship, where there is active concealment" or where one "takes advantage of a party he knows to be laboring under a delusion") (citing Young v. Hirsch, 199 S.E. 179, 184 (1938)).
10 See Smith v. Petrou, 705 F. Supp. 183, 187 (S.D.N.Y. 1989) (proof of scheme between broker-dealer and customer's investment advisor establishes requisite control of broker-dealer for churning liability, even if advisor "alone made the investment decisions."); see also Moore, 32 S.E.C. at 196; William Hay, 19 S.E.C. at 407.
|11|| In other enforcement actions, the Commission has found excessive annual turnover rates of 4.5 and lower. See, e.g., In re Laurie Jones Canady, Exchange Act Rel. No. 41250 (April 5, 1999), 69 SEC Dkt. 1468, 1476 (annual turnover rates ranging from 3.83 to 7.28 held excessive); In re Donald A. Roche, 64 SEC Dkt. 2046-47 (annual turnover rates of 3.3, 4.6, and 7.2 held excessive); In re Gerald E. Donnelly, 61 SEC Dkt. 50-51 (annual turnover rates ranging from 3.1 to 3.8 held excessive).
12 Section 15B(c)(1) states that: "No broker, dealer, or municipal securities dealer shall make use of the mails or any instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in contravention of any rule of the [MSRB]."
13 See In re Stephens Inc., Exchange Act Rel. No. 40699 (Nov. 23, 1998), 68 SEC Dkt. 1854, 1866 (municipal securities broker-dealer violated MSRB rule G-17 by failing to disclose financial and other relationships between itself and the fiduciaries of a municipal issuer, because such relationships created actual or potential conflicts of interest).
|14|| Rule G-17 provides that: "In the conduct of its municipal securities business, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice."
15 Rule G-37 represents an attempt "to insulate the municipal securities industry from the potentially corrupting influence of political contributions that are made in close proximity to the awarding of municipal securities business." In re Morgan Stanley & Co., Exchange Act Rel. No. 39459 (Dec. 17, 1997), 66 SEC Dkt. 351, 353. The core of the rule, which took effect on April 25, 1994, is that "a firm may not engage in municipal securities business with an issuer for a two-year period if an official of the firm has made a contribution covered by the rule." Id. The rule provides a strict, broad prophylactic, and does not require any evidence of a quid pro quo. See Blount v. SEC, 61 F.3d 938, 942 (D.C. Cir. 1995), cert. denied, 116 U.S. 1351 (1996).
16 Rule G-37(b) provides in pertinent part that: "No broker, dealer, or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the broker, dealer or municipal securities dealer; [or] (ii) any municipal finance professional associated with such broker, dealer or municipal securities dealer [except for contributions not exceeding $250 per election to a candidate for whom the contributor is entitled to vote].
17 Rule G-37(d) provides that: "No broker, dealer or municipal securities dealer or any municipal finance professional shall, directly or indirectly, through or by any other person or means, do any act which would result in a violation of sections (b) or (c) of this rule."
|18||See Superintendent of Ins. v. Bakers Life & Cas., 404 U.S. 6, 12-13 (1971) (an omission was "in connection with" the sale of securities because it was a "deceptive practice touching on the sale of securities."); SEC v. Jakubowski, 150 F.3d 675, 679-680 (7th Cir. 1998) (misrepresentation about buyer's eligibility to purchase securities from an issuer satisfied both "materiality" and "in connection with" requirements of section 10(b) of the Exchange Act and rule 10b-5).|
|19|| Even if all three-rather than just two-of the $250 money orders were returned, the two-year underwriting bar of rule G-37 still would have applied to PMC. The MSRB has stated that the bar applies after any contribution that does not meet the de minimis exception and that even if a refund of a contribution is obtained, dealers are still required to seek an exemption from the bar. MSRB Interpretations, published in MSRB Manual (CCH) ¶ 3681, at 5462-63 (April 1997).
20 Rule G-37(g)(vi) specifically includes "candidate" within the definition of persons to whom one cannot contribute without triggering the bar. The MSRB has stated that the rule renders the dealer "subject to the two-year ban on business with the issuer, regardless of whether the candidate wins or loses the election." MSRB Interpretations, published in MSRB Manual (CCH) ¶ 3681, at 5469-70 (April 1997).
|21||Rule G-37(c) provides that: "No broker, dealer, municipal securities dealer, or municipal finance professional may solicit or coordinate contributions to an official of an issuer with which the broker, dealer, or municipal securities dealer is engaging or is seeking to engage in municipal securities business."|
|22||Rule G-37(e) requires disclosure even of contributions that are returned to the contributor. MSRB Interpretations, published in MSRB Manual (CCH) ¶ 3681, at 5463 (April 1997).|
|23|| As a municipal securities broker subject to the net capital requirements of Exchange Act rule 15c3-1, PMC was also required by MSRB rule G-8(a)(x) to maintain books and records specified in rule 17a-3 of the Exchange Act, including ledgers or other records reflecting all expense accounts.
24 In imposing this penalty, the Commission considered the Respondent's inability to pay such a penalty. See Exchange Act Section 21B(d).
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