UNITED STATES OF AMERICA
In the Matter of
Schwendiman Partners, LLC, Gary
|ORDER INSTITUTING PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") to determine whether Schwendiman Partners, LLC ("S Partners LLC"), Gary Schwendiman, and Todd G. Schwendiman (hereinafter "Respondents") violated the federal securities laws and, if so, what remedial actions or sanctions are appropriate under the circumstances of this case.
In anticipation of the institution of these administrative proceedings, Respondents have submitted a joint Offer of Settlement ("Offer"), 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 in which the Commission is a party, and without admitting or denying the findings herein, except that Respondents, by their Offer of Settlement, admit the Commission's jurisdiction over them and over the subject matter of these proceedings and the findings in paragraphs II.A, B, and C below, Respondents have consented to the entry of the findings and the imposition of the remedial sanctions and monetary penalties as set forth below.
On the basis of this Order and the Offer submitted by Respondents, the Commission finds that:
A. S Partners LLC, based in Lincoln, Nebraska, is a Delaware limited liability company formed in December 1997 and has been registered with the Commission as an investment adviser since July 1998. In July 2001, Schwendiman Partners, a Nebraska general partnership registered with the Commission as an adviser since May 1996, merged into S Partners LLC. S Partners LLC manages several private investment companies (each a "fund" and referred to herein as funds).
B. Gary Schwendiman, 61, of Lincoln, Nebraska, owns 50 percent of and has been a principal of S Partners LLC since its creation in 1997. From 1995 until 2001, he was a principal of Schwendiman Partners. Since 1999, Gary Schwendiman also has been a principal of Schwendiman Technology Management Company, LLC ("STMC").
C. Todd G. Schwendiman, 34, of Charlotte, North Carolina, owns 50 percent of and has been a principal of S Partners LLC since 1997. From 1995 until 2001, he was a principal of Schwendiman Partners. He has been a principal of STMC since 1999.
D. On three separate occasions between 1999 and 2000, S Partners LLC, through Gary Schwendiman and Todd Schwendiman, breached their fiduciary duties to advisory clients, demonstrating a pattern of Respondents putting their own interests before advisory clients'.
E. First, through Todd Schwendiman, S Partners LLC took for itself a limited investment opportunity from a fund it advised. In October 1999, Todd Schwendiman, in his capacity as a principal of S Partners LLC, was presented with a limited opportunity with respect to certain shares of stock not publicly traded in the United States. A fund advised by S Partners LLC had previously purchased and sold the same stock, and was legally and financially capable of taking the limited investment opportunity. S Partners LLC informed the fund about the opportunity, but failed to disclose that the stock would be bought and sold on the same day, at a profit, with little cost or risk. S Partners LLC then took the investment for itself, thereby foreclosing the fund from making the same investment, and received $21,376 of ill-gotten gains.1
F. Second, through Todd Schwendiman, S Partners LLC gave preferential treatment to certain advisory clients. By September 2000, ten of twelve investors in a fund advised by S Partners LLC requested that their capital be redeemed. Todd Schwendiman then determined to liquidate all of the securities held in the fund and to dissolve the fund. Pursuant to the fund's liquidation provisions, the investors' capital was to be returned as the securities in the fund were sold. During the course of the liquidation, even though all of the securities in the fund had not yet been sold, S Partners LLC allowed two of the twelve investors to exit the fund at the then-current value because they had agreed to invest in another similar fund advised by S Partners LLC. As a result, the other ten investors were left to bear the market risk of the assets remaining in the fund.
G. Third, through Gary Schwendiman, S Partners LLC distributed proceeds from the liquidation of a fund's assets pursuant to the fund's redemption provision instead of the fund's liquidation provision, resulting in a personal benefit to Gary Schwendiman. Gary Schwendiman was the sole beneficiary of a retirement account that was an investor in a fund advised by Schwendiman Partners (referred to herein as S Partners LLC as a result of the merger referenced in paragraph II.A). In April 1999, after S Partners LLC advised the fund's investors that the fund was losing money, all of the investors, other than Gary Schwendiman's retirement account, instructed S Partners LLC to return the value of their capital accounts. S Partners LLC then effectively liquidated the fund. Between December 31, 1999 and June 27, 2000, when the last of the fund's holdings were sold, the value of the fund increased. When distributions were made in February 2000 and in August 2000 to all of the investors, other than to Gary Schwendiman's retirement account, those distributions were made pursuant to the fund's redemption provision instead of the fund's liquidation provision. As a result, the investors, other than Gary Schwendiman's retirement account, received only the value of their capital accounts as of December 31, 1999, the redemption date. Had Gary Schwendiman distributed the proceeds pursuant to the fund's liquidation provision, all of the investors would have shared in the increased value of the fund. By distributing the fund's assets in accordance with the fund's redemption provision rather than the liquidation provision, Gary Schwendiman's retirement account received a windfall of $60,309.2
H. By virtue of the conduct described above in paragraphs II.F and G, Respondents willfully violated Section 17(a) of the Securities Act, which prohibits the use of manipulative and deceptive practices, including making any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made not misleading, in the offer or sale of securities. By virtue of the conduct described above in paragraphs II.E, F and G, Respondents willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit such conduct in connection with the purchase or sale of securities.
I. By virtue of the conduct described above, S Partners LLC willfully violated Sections 206(1) and 206(2) of the Advisers Act, which prohibit any investment adviser, by the use of the mails or other means or instruments of interstate commerce from, directly or indirectly, employing any device, scheme or artifice to defraud any client or prospective client.
J. By virtue of the conduct described above, Gary Schwendiman and Todd Schwendiman caused and willfully aided and abetted S Partners LLC's violations of Sections 206(1) and 206(2) of the Advisers Act.
In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Respondents and to impose the sanctions specified therein.
Accordingly, IT IS ORDERED that:
A. Pursuant to Sections 203(e) and 203(f) of the Advisers Act, Respondents be censured.
B. Pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 203(k) of the Advisers Act, Respondents cease and desist from committing or causing any violation or future violation of 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.
C. Within 30 days of the issuance of the Order, Respondents each shall pay civil money penalties in the amount of $25,000 (totaling $75,000) to the United States Treasury. Such payments 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 Office of the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies S Partners LLC, Gary Schwendiman, and Todd G. Schwendiman as the Respondents in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Donald M. Hoerl, Associate Regional Administrator, Securities and Exchange Commission, Central Regional Office, 1801 California Street, Suite 4800, Denver, Colorado 80202.
D. S Partners LLC shall comply with its undertakings to:
By the Commission.
Jonathan G. Katz
|1||On March 7, 2002, S Partners LLC disgorged voluntarily its gain of $21,376, plus prejudgment interest in the amount of $4,383.|
|2||On March 7, 2002, Gary Schwendiman disgorged voluntarily the gains his retirement account received in the amount of $60,309, plus prejudgment interest in the amount of $8,455.|
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