UNITED STATES OF AMERICA
|In the Matter of
Vincent Deuschel and
Tucker Anthony, Inc.,
|ORDER INSTITUTING PROCEEDDINGS PURSUANT TO SECTIONS 15(b) and 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS,ISSUING A CEASE-AND-DESIST ORDER, AND IMPOSING REMEDIAL SANCTIONS|
The Commission deems it appropriate and in the public interest that proceedings be, and they hereby are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Vincent Deuschel and Tucker Anthony, Inc. (collectively, "Respondents").
In anticipation of the institution of these proceedings, each of the Respondents has submitted an Offer of Settlement that the Commission has determined to accept.1 Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. ¶ 201.100 et seq., each of the Respondents, without admitting or denying the findings contained herein, except that each of the Respondents admits to the jurisdiction of the Commission over him or it and over the subject matter of these proceedings, consents to the issuance of this Order Instituting Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings, Issuing a Cease-and-Desist Order, and Imposing Remedial Sanctions.
The Commission makes the following findings:
Vincent Deuschel, 40, was a trader on the mortgage-backed securities desk at Tucker Anthony from approximately 1994 to November 1997. At all relevant times, he was licensed to sell securities, holding a Series 7 general securities license. He is not currently associated with any regulated entity and has never been disciplined by the Commission or any self-regulatory organization.
Tucker Anthony, Inc. ("Tucker Anthony"), is registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. Tucker Anthony has its principal offices in Boston and in New York City. During the relevant period, Tucker Anthony was the largest subsidiary of Freedom Securities Corporation. Freedom Securities is now known as Tucker Anthony Sutro Corporation.
This matter involves the concealment of trading losses by Vincent Deuschel. Deuschel was a mortgage-backed securities trader at Tucker Anthony from 1994 to November 1997. In early 1997, Deuschel was trading treasury securities for a Tucker Anthony proprietary account when he lost approximately $200,000. Deuschel concealed the loss by inaccurately reporting the market value of certain securities held in the proprietary account. Deuschel then attempted to cover the $200,000 loss by trading treasury securities. However, Deuschel's losses grew, and by November 1997, when the losses were discovered, they totaled approximately $2.6 million.
Deuschel's conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Tucker Anthony did not detect Deuschel's trading losses and failed reasonably to supervise Deuschel with a view toward preventing his fraudulent conduct. As a result of Deuschel's conduct, Tucker Anthony's books, records, and FOCUS reports did not accurately reflect the firm's trading profits and net income, resulting in the violation of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-5 thereunder. Deuschel willfully aided and abetted, and caused Tucker Anthony's violations of Section 17(a) and Rules 17a-3 and 17a-5 thereunder.
Deuschel traded mortgage-backed securities in a Tucker Anthony proprietary account.2 He was required at the conclusion of each day to mark to market each of the securities held in the proprietary account.3 Tucker Anthony's accounting department used the mark to market values (or "marks") to calculate asset values and corresponding profit and loss data for financial reporting purposes. The accounting department also used the traders' marks to compute the firm's net capital.
In early 1997, Deuschel lost approximately $200,000 trading treasury securities. Instead of reporting the trading losses accurately, Deuschel hid them by mismarking (i.e., falsifying the mark to market prices) certain securities in the proprietary account. Although Deuschel was authorized to trade treasury securities only to hedge his positions in mortgage-backed securities, Deuschel attempted to recover the losses in the account by actively trading treasury securities. Deuschel's treasury securities trading was unsuccessful, and his losses grew. By the end of May 1997, he had lost approximately $1 million.
At the end of May 1997, Tucker Anthony was installing new software that would automatically override Deuschel's marks with the marks of the firm's government securities trading desk if both he and the government desk owned the same security. In order to continue to conceal his trading losses, Deuschel stopped mismarking his treasury positions and hid his losses by mismarking a large short position in a single mortgage-backed security, a when-issued 30-year bond.4
Tucker Anthony did not discover the losses in the proprietary account or the fact that Deuschel's positions were mismarked. For the next six months, Deuschel continued to trade treasury securities in an unsuccessful attempt to try to recoup his losses. Shortly before each when-issued 30-year mortgage-backed bond began trading regular way, Deuschel would close out his short position, but would continue to conceal the loss by mismarking a new short position in a when-issued mortgage-backed bond.
By November 1997, Deuschel's losses had grown to more than $2.6 million. At that time, Tucker Anthony was installing new software that would automatically override marks on mortgage-backed securities positions with the marks of a supervisor. On November 24, 1997, persons at Tucker Anthony and Tucker Anthony's clearing firm, who were involved in the software installation project, noticed the mismarking and questioned Deuschel and his supervisor about it. The next morning, Deuschel resigned and admitted that he had been mismarking his securities positions to conceal trading losses.
Deuschel was successful in concealing his losses because the marks were not reviewed for accuracy. Deuschel's supervisor and others regularly were provided copies of reports that could have been, but were not, used to monitor marks. Deuschel's marks appeared on at least three trade reports that were generated by Tucker Anthony's computer system and that were circulated to his supervisor and to others. The reports showed each security in each fixed-income trader's inventory at two prices-the mark that the trader manually entered into the firm's computer system and the price supplied by an independent pricing service. The two prices appeared adjacent to each other on the reports. In addition, two of the three reports showed the unrealized gain or loss for each position. Also, two of the three reports showed the unrealized losses for Deuschel's account as a whole. For example, as of May 30, 1997, the reports showed that Deuschel's account had an overall unrealized loss of $1,095,470. Each of these reports revealed the losses Deuschel was trying to conceal.5 However, Tucker Anthony's written supervisory procedures did not require Deuschel's supervisor to review these reports to ensure the trader's marks were accurate.
Deuschel's mismarking caused inaccuracies in Tucker Anthony's books and records. Tucker Anthony's accounting department used the mark to market prices posted daily by the firm's traders to calculate asset values and corresponding profit and loss data for financial reporting purposes. The accounting department also used the traders' marks to compute the firm's net capital. Due to Deuschel's mismarking, Tucker Anthony's general ledgers, income statements and FOCUS Reports overstated the firm's net income and net capital by $2.6 million as of the end of October 1997.
A. Deuschel's Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the employment of fraudulent schemes or the making of material misrepresentations and omissions in connection with the purchase or sale of securities. Establishing violations of Rule 10b-5 requires a showing of scienter. Scienter is "a mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976).
As discussed above, after Deuschel's initial loss of approximately $200,000, he intentionally deceived Tucker Anthony by misrepresenting his trading as profitable, when it was not. Through his mismarking, Deuschel deceived Tucker Anthony. As a consequence, Tucker Anthony permitted him to continue to purchase and sell securities for more than six months. During that time, Deuschel's losses continued. Deuschel's mismarkings were material misrepresentations and omissions and part of a scheme to defraud Tucker Anthony in connection with the purchase or sale of securities. Accordingly, Deuschel violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
B. Tucker Anthony's Inadequate Supervisory Procedures With Respect to the Review of Traders' Marks
"`The responsibility of broker-dealers to supervise their employees by means of effective, established procedures is a critical component in the federal investor protection scheme regulating the securities market.'" In re Lehman Brothers, Inc., Exchange Act Rel. No. 37673, 1996 SEC LEXIS 2453, at *21 (Sept. 12, 1996) (internal citation omitted). Furthermore, "`in large organizations it is especially imperative that the system of internal control be adequate and effective....'" Id. The Exchange Act authorizes the Commission to bring an administrative proceeding against a broker-dealer if the firm or anyone associated with the firm has "failed reasonably to supervise, with a view to preventing violations of [the federal securities laws], another person who commits such a violation, if such person is subject to his supervision."6 Section 15(b)(4)(E) of the Exchange Act.
Tucker Anthony did not have adequate supervisory procedures (written or otherwise) to ensure that securities held in proprietary accounts were marked to market accurately. Tucker Anthony's written policies and procedures did not assign responsibility to any supervisor for verifying traders' mark to market valuations. The firm's written supervisory procedures designated the director of the firm's fixed-income department and the head of its mortgage-backed securities trading desk, as Deuschel's supervisor, and the director regularly was provided copies of the trade reports that would have revealed Deuschel's conduct. However, no written procedures required the director to review those reports or to confirm the accuracy of marks recorded by the traders he
supervised. As a result, Tucker Anthony failed reasonably to supervise Deuschel with a view to preventing his violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
C. Tucker Anthony's Books, Records and Reporting Violations, and Deuschel's Aiding, Abetting and Causing of Those Violations
Section 17(a) of the Exchange Act requires brokerage firms to create and maintain records that the Commission designates through its rules. Rule 17a-3 requires that broker-dealers make and keep current a number of books and records, including records that reflect the firm's (1) income, expense, and capital accounts (Rule 17a-3(a)(2)); and (2) aggregate indebtedness and net capital as of the trial balance date pursuant to Exchange Act Rule 15c3-1 (see Rule 17a-3(a)(11)). Information contained in these required records must be accurate. See Sinclair v. SEC, 444 F. 2d 399, 401 (2d Cir. 1971); In the Matter of James F. Novak, Exchange Act Rel. No. 19660, 1983 SEC LEXIS 2023 (Apr. 8, 1983). Information about the firm's proprietary accounts is only accurate if the assets in those accounts are valued at market value. In the Matter of the Nikko Secs. Co. Int'l, Exchange Act Rel. No. 40375, 1998 SEC LEXIS 1827 (SEC Aug. 27, 1998).
Section 17(a) of the Exchange Act also requires brokerage firms to make and disseminate such reports as the Commission prescribes by rule. Rule 17a-5(a) requires broker-dealers to file monthly and quarterly unaudited financial reports, known as FOCUS Reports, with the Commission or a self-regulatory organization. The FOCUS Report "constitutes the basic financial and operational report required of those brokers or dealers subject to any minimum net capital requirement . . . ." Form X-17A-5, Part II (General Instructions). Again, information in those reports must be accurate. See In the Matter of D.S. Meyers & Co. Inc., Exchange Act Rel. No. 22417, 1985 SEC LEXIS 685 (Sept. 17, 1985).
As a result of Deuschel's mismarking, Tucker Anthony's books and records overstated the firm's net income and net capital for the period April through October 1997, in violation of Section 17(a) of the Exchange Act and Rule 17a-3. In addition, Deuschel's mismarking caused Tucker Anthony to file seven inaccurate monthly FOCUS Reports from April through October 1997, in violation of Section 17(a) of the Exchange Act and Rule 17a-5(a).
Deuschel aided and abetted, and caused, Tucker Anthony's books, records, and reporting violations. Pursuant to Section 15(b)(6) of the Exchange Act, the Commission may sanction a person who willfully aided and abetted another person's violation of the federal securities laws and who at the time of the alleged misconduct was associated with a broker or dealer. Three elements are necessary to bring an aiding and abetting charge. First, there must an independent securities law violation by another party. Second, the aider and abettor must provide substantial assistance in the violation. Finally, the aider and abettor must have a general awareness or knowledge that his or her role is part of an activity that is improper or illegal.
Here, the independent securities law violations are Tucker Anthony's books, records, and reporting violations. Deuschel's concealment of the losses substantially assisted those violations, and Deuschel knew that his concealment was part of an improper activity. Deuschel therefore willfully aided and abetted Tucker Anthony's violations. In addition, under Section 21C(a) of the Exchange Act, Deuschel caused Tucker Anthony's books, records, and reporting violations by intentionally mismarking positions in Tucker Anthony's account, which he knew or should have known would contribute to Tucker Anthony's violations.
Based upon the foregoing, the Commission finds:
A. That Deuschel willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
B. That Tucker Anthony failed to reasonably supervise Deuschel, who was subject to its supervision, pursuant to Section 15(b)(4)(E) of the Exchange Act, with a view toward preventing Deuschel's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
C. That Tucker Anthony violated Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-5 thereunder;
D. That Deuschel willfully aided and abetted, and caused, Tucker Anthony's violations of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-5 thereunder; and
E. That the imposition of a civil money penalty against Deuschel is appropriate. However, Deuschel has submitted a sworn financial statement and has asserted his financial inability to pay a civil penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Deuschel and has determined that Deuschel does not have the financial ability to pay a civil penalty.
In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers of Settlement submitted by Deuschel and Tucker Anthony.
Accordingly, IT IS HEREBY ORDERED, pursuant to Sections 15(b) and 21C of the Exchange Act:
A. That Deuschel be, and hereby is, censured;
B. That Deuschel cease and desist from committing or causing any violations of, and committing or causing any future violations of Sections 10(b) and 17(a) of the Exchange Act and Rules 10b-5, 17a-3 and 17a-5 thereunder;
C. That Deuschel be, and hereby is, barred from association with any broker or dealer;
D. That the Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter as to Deuschel to consider whether Deuschel provided accurate and complete financial information at the time such representations were made; (2) determine the amount of civil penalty to be imposed as to Deuschel; and (3) seek any additional remedies as to Deuschel that the Commission would be authorized to impose in this proceeding if Deuschel'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 Deuschel was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed and whether any additional remedies should be imposed. Deuschel 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 proceeding;
E. That Tucker Anthony be, and hereby is, censured;
F. That Tucker Anthony cease and desist from committing or causing any violation, and committing or causing any future violations of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-5 thereunder; and
G. That within 10 days of the entry of this Order, Tucker Anthony shall pay a civil money penalty in the amount of $50,000 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 Securities and Exchange Commission; (c) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (d) submitted under cover letter that identifies Tucker Anthony as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Kyra C. Armstrong, Branch Chief, Division of Enforcement, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-0806.By the Commission.
1 In determining to accept the Respondents' Offers of Settlement, the Commission considered remedial acts promptly undertaken by Tucker Anthony and cooperation afforded the Commission staff by the Respondents.
2 All of Deuschel's trading described herein related only to proprietary trading: no client assets were ever affected, and Tucker Anthony's net capital was never impaired.
3 "Mark to market" refers to "the process of valuing (market value or fair value) security positions, which is recognized as the generally accepted accounting principle for purposes of determining a profit or loss on security positions in proprietary trading and investment accounts." American Institute of Certified Public Accountants, Brokers and Dealers in Securities, at 253 (1999). Here, "mismarking" refers to valuations that do not accurately reflect market values.
4 When-issued trading is trading of a security "when, as and if issued." For the bonds at issue here, when-issued trading begins approximately three months prior to the date that that security is issued. On the date of issuance, the security begins trading the "regular way."
5 In addition, the market price of the bond that Deuschel was mismarking was always much higher than his marked price. Therefore, each time he bought to cover the short when-issued bond position in the account and sold short a new when-issued bond, the account would show a large loss from covering the old series at the market price and a large offsetting profit from his false mark on the new series. Deuschel re-established the mismarked bond position several times, and each time the firm's trade reports showed both the large loss and the instantaneous profit caused by his mismarking of the old and new series. However, no one questioned Deuschel about the discrepancies.
6 Section 15(b)(4)(E) provides a safe harbor from failure to supervise sanctions if (1) a system of procedures was established and applied to reasonably prevent and detect the federal securities law violations by supervised individuals and (2) the supervisor reasonably applied the procedures and believed that the supervised individual was complying with the procedures. In this case, the safe harbor does not apply, because Tucker Anthony had no procedures or systems designed to detect the violations. See Lehman Brothers, Inc., 1996 SEC LEXIS 2453 at *22 n.11.
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