Securities Act of 1933
Release No. 7717 / August 2, 1999
Securities Exchange Act of 1934
Release No. 41695 / August 2, 1999
File No. 3-9959
ENFORCEMENT ACTION INSTITUTED AGAINST DEL MAR FINANCIAL SERVICES, INC., PRIVATE BROKERS CORPORATION AND OTHERS
The Securities and Exchange Commission today instituted public administrative and cease-and-desist proceedings against Del Mar Financial Services, Inc., Private Brokers Corporation (formerly Private Brokers Clearing Corporation), Del Mar's president, Kevin Conway Dills, PBCC's president Robert A. Roberts, two former employees of Del Mar, Philip S. Brandon and Matthew Jennings, and Jai Chaudhuri.
The order instituting proceedings charges the respondents with two separate fraudulent schemes involving Comparator Systems Corporation stock:
First, from January of 1995 until March of 1996, Dills, the owner and principal of Del Mar, received over $360,000 in undisclosed compensation from Chaudhuri in connection with the sale of Comparator stock to Del Mar clients. Chaudhuri purchased large blocks of Comparator stock at a discount from investors. Dills caused Del Mar to mail promotional materials to actual and potential clients to generate buying interest in the stock. Del Mar then purchased Chaudhuri's stock on behalf of its clients. Chaudhuri, in turn, gave a portion of the profits of these transactions to Dills. To compensate Dills and Del Mar for their promotional efforts, Comparator gave additional shares of its stock to Chaudhuri.
Second, in May of 1996, Del Mar defrauded numerous Del Mar customers who sold Comparator stock on Friday, May 3 and Monday, May 6, 1996, when the price of Comparator's stock rose from $.03 to $1.00 per share. During this extraordinary price run-up, Del Mar's trader, Jennings, sold more Comparator stock to dealers from Del Mar's proprietary trading account than he purchased from Del Mar's customers into that account. Del Mar, therefore, sold Comparator stock short and had to cover those short positions as the price was rising. This resulted in Del Mar's suffering trading losses of over $900,000.
As Del Mar's "clearing broker," PBCC handled the "back-office" paperwork associated with completing securities transactions and cleared trades by Del Mar's customers. If Del Mar had not been able to meet its obligations with respect to trades, PBCC, as its clearing broker, would have been required to do so. In order to recoup Del Mar's trading losses, Dills, acting at the suggestion of Roberts and PBCC, fraudulently canceled and "corrected" a substantial portion of Del Mar's trades with its retail customers by reducing the prices of those trades on the order tickets. Jennings and Brandon participated in the changing of order tickets, and Brandon subsequently misrepresented the reasons for the changes to Del Mar customers.
The changes to the order tickets reduced Del Mar's loss to less than $90,000, while shifting over $800,000 of Del Mar's trading loss to its customers, in the form of diminished profits on those customers' trades. Roberts and PBCC were aware of the losses and the fact that changing the client order tickets was improper. Nevertheless, Roberts suggested to Dills that Del Mar change the tickets, and, with Roberts' knowledge, PBCC issued false trade confirmations and account statements which misstated the amount the customers should have received for the sale of their Comparator stock.
The order charges that, as a result of this conduct, (1) Del Mar willfully violated Sections 17(a) of the Securities Act of 1933 (the "Securities Act") and Sections 10(b), 15(c)(1)(A), 15(c)(3) and 17(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5, 10b-10, 15c1-2, 15c3-1, 17a-3 and 17a-11 thereunder; (2) Dills willfully violated Sections 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and caused and willfully aided, abetted, counseled, commanded, or induced Del Mar's violations of Sections 15(c)(1)(A), 15(c)(3) and 17(a) of the Exchange Act and Rules 10b-10, 15c1-2, 15c3-1, 17a-3 and 17a-11 thereunder ; (3) PBCC and Roberts willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, PBCC additionally violated Sections 15(c)(1)(A) and 17(a) of the Exchange Act and Rules 10b-10, 15c1-2 and 17a-3 thereunder, Roberts caused and willfully aided, abetted, counseled, commanded, or induced those violations, and Roberts and PBCC caused and willfully aided, abetted, counseled, commanded, or induced Dills's and Del Mar's violations of Section 17(a) of the Securities Act, Sections 10(b), 15(c)(1)(A) and 17(a) of the Exchange Act and Rules 10b-5, 10b-10, 15c1-2 and 17a-3 thereunder; (4) Brandon and Jennings caused and willfully aided, abetted, counseled, commanded, or induced Del Mar's violations of Section 17(a) of the Securities Act and Sections 10(b), 15(c)(1)(A) and 17(a) of the Exchange Act and Rules 10b-5, 10b-10, 15c1-2 and 17a-3 thereunder, and (5) Chaudhuri violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and Chaudhuri caused Dills's and Del Mar's violations of Sections 17(a) of the Securities Act and Sections 10(b) and 15(c)(1)(A) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder.
This proceeding has been instituted pursuant to Section 8A of the Securities Act and Sections 15(b)(4), 15(b)(6), and 21C of the Exchange Act. A hearing will be held before an administrative law judge to determine whether the allegations against the respondents are true, and if so, to determine what remedial sanctions are appropriate and in the public interest, and whether the respondents should be ordered to pay disgorgement and/or civil penalties.
This enforcement action is a result of the Commission's investigation concerning Comparator and trading in its securities. On May 14, 1996, the Commission suspended trading in the stock of Comparator, and on May 31, 1996, the Commission filed an action in the United States District Court for the Central District of California alleging that Comparator and others had disseminated false information regarding Comparator's purported fingerprint identification products and financial condition. The Court has issued a number of injunctions and orders against Comparator and its officers and directors requiring disgorgement and other relief See Litigation Release No. 15855 and Accounting and Auditing Enforcement Release No. 1068, dated August 20, 1998; Litigation Release No. 14927 and Accounting and Auditing Enforcement Release No. 786, dated May 31, 1996; Litigation Release No. 14979 and Accounting and Auditing Enforcement Release No. 801, dated July 11, 1996; Securities Exchange Act Release No. 37702 and Accounting and Auditing Enforcement Release No. 818, dated September 19, 1996; and Litigation Release No. 15056 and Accounting and Auditing Enforcement Release No. 819, dated September 19, 1996.
This enforcement action is part of the Commission's four-pronged approach to attacking microcap fraud: enforcement, inspections, investor education and regulation. For more information about the SEC's response to microcap fraud and the litigation release for this case, visit the SEC's Microcap Fraud Information Center at http://www.sec.gov/news/extra/microcap.htm.