UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") be instituted against respondent George M. Lintz ("Lintz").
In anticipation of the institution of this administrative proceeding, Lintz has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except that Lintz admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Lintz consents to the entry of this Order Instituting Public Administrative Proceeding, Making Findings and Imposing Sanctions ("Order").
Accordingly, IT IS ORDERED that a proceeding pursuant to Section 15(b) of the Exchange Act be, and hereby is, instituted.
On the basis of this Order and Lintz's Offer, the Commission finds that:1
Lintz, age 39, resides in Valley Village, California. From 1988 to 2000, Lintz was the CEO and president of Lintz Glover White & Co., Inc.
B. RELATED ENTITY AND PERSONS
1. Lintz Glover White & Co., Inc. ("LGW"), now defunct, was a broker-dealer located in Sherman Oaks, California. LGW was registered with the Commission (File No. 8-40047) from September 1988 to September 2000. The firm conducted a general securities business for institutional customers.
2. Alan Brian Bond ("Bond"), age 39, resides in Upper Montclair, New Jersey. From 1991 to December 1998, he was the president and chief investment officer of Bond, Procope Capital Management, Inc. ("BPCM"), which was formerly a registered investment adviser (File No. 801-38855).
3. Robert I. Spruill ("Spruill"), age 53, lives in Newark, New Jersey. Spruill was associated as a registered representative with LGW from July 1996 to January 1998.
C. BOND'S SCHEME AT LGW
From at least January 1993 through November 1998, Bond perpetrated a kickback scheme, in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940, in which he received over $6.9 million in commissions from three broker-dealers, one of which was LGW. Bond used the three broker-dealers to execute trades for his advisory clients. Between July 1996 and January 1998, Bond received kickbacks from LGW through commission payments that LGW made to Spruill, who was a registered representative at LGW at that time.
D. SPRUILL AIDS AND ABETS BOND'S SCHEME
1. Bond perpetrated his scheme at LGW with the assistance of Spruill. Specifically, Bond directed advisory trades to LGW using Spruill as the registered representative on his clients' accounts. Spruill asked Lintz to pay the commissions on these trades to Satchmo, a dummy corporation created by Spruill. Spruill then used Satchmo to funnel kickbacks to Bond.
2. Spruill, through Satchmo, received approximately 57% of the revenue that LGW made on Bond's trading. Spruill then used a Satchmo bank account to pay Bond's personal credit card bills. Spruill also made payments of cash directly to Bond from the Satchmo account. Between July 1996 and January 1998, LGW paid Satchmo a total of at least $4,260,983. Of that amount, approximately $2,800,704 was kicked back to Bond and the remainder was kept by Spruill. By engaging in this conduct, Spruill aided and abetted Bond's fraudulent scheme.
E. LINTZ'S FAILURE TO SUPERVISE
1. Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4)(E) of the Exchange Act, authorizes the Commission to sanction a person associated with a broker or dealer if it finds that it is in the public interest to do so and that the person "failed reasonably to supervise, with a view to preventing violations of the [federal securities laws] . . ., another person who commits such a violation, if such other person is subject to his supervision."
2. Lintz was LGW's CEO and Spruill's supervisor. Spruill's request that his commissions be paid to Satchmo, an unregistered entity, should have been a red flag, or suggestion of irregularity, for Lintz. Lintz's agreement to pay commissions to Satchmo was an irregular arrangement with an unregistered entity. See, e.g., Century Investment Group Inc., SEC No-Action Letter, 1996 SEC No-Act. LEXIS 181 (Jan. 29, 1996) (no-action relief denied where broker-dealer sought to pay registered representative's compensation to the registered representative's corporation, without the corporation registering as a broker-dealer in accordance with Section 15(b) of the Exchange Act); Voluntary Benefit Systems Corporation of America, SEC No-Action Letter, 1995 SEC No-Act. LEXIS 814 (Nov. 14, 1995) (same); Lombard Securities Inc., SEC No-Action Letter, 1994 SEC No-Act. LEXIS 920 (July 12, 1994) (same).
3. Furthermore, Lintz, as LGW's CEO and Spruill's supervisor, should have questioned the payments to Satchmo because of the red flag raised by the Bond-Spruill relationship. In July 1996, Lintz met with Bond who informed him that his business would follow Spruill to LGW. Lintz also knew that Bond was Spruill's best client, accounting for 90-95% of Spruill's business. Lintz further knew, or should have known, that Spruill used funds paid to Satchmo to pay for marketing activities that benefited both Bond and Spruill.
4. Notwithstanding the commission payments to an unregistered entity and the relationship between Bond and Spruill, Lintz paid over $4 million of Spruill's commissions to Satchmo over the course of Spruill's employment at LGW. Despite these red flags or suggestions of irregularity, Lintz made no inquiries into the specifics of the marketing activities that benefited both Bond and Spruill until December 1997.2
5. The "supervisory obligations imposed by the federal securities laws require a vigorous response even to indications of wrongdoing." In re John H. Gutfreund, Exchange Act Release No. 31554, 1992 SEC LEXIS 2939, at *34 (Dec. 3, 1992). Thus, supervisors must respond not only when they are "explicitly informed of an illegal act," but also when they are "aware only of `red flags' or `suggestions' of irregularity." See id. at *34-35. In addition, "[e]ven where the knowledge of supervisors is limited to `red flags' or `suggestions' of irregularity, they cannot discharge their supervisory obligations simply by relying on the unverified representations of employees." Id. at *35. "Red flags and suggestions of irregularities demand inquiry as well as adequate follow-up and review." In re Edwin Kantor, Exchange Act Release No. 32341, 1993 SEC LEXIS 1240, at *16 (May 20, 1993).
6. Here, Lintz failed to respond to the red flags raised by Spruill's request that his commissions be paid to Satchmo and by the relationship between Bond and Spruill. He, therefore, failed reasonably to supervise Spruill with a view to preventing Spruill's securities law violations.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Lintz and impose the sanctions specified in the Offer.
Accordingly, IT IS HEREBY ORDERED that Lintz be, and hereby is, barred from association in a supervisory capacity with any broker or dealer.
IT IS FURTHER ORDERED that Lintz shall, within fourteen days of the entry of this Order, pay a civil money penalty in the amount of $30,000 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 George M. Lintz 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 Victoria A. Levin, Esq., Office of Enforcement, Securities and Exchange Commission, 5670 Wilshire Blvd., 11th Floor, Los Angeles, CA 90036.
By the Commission.
Footnotes1 The findings herein are made pursuant to Lintz's Offer and are not binding on any other person or entity in this or any other proceeding.
2 In December 1997, and after Spruill had asked Lintz for money for a down payment on a condominium for Bond, Lintz questioned the marketing expenses being paid by Satchmo and asked Spruill for an accounting. That same month, Spruill left LGW, having never produced a complete accounting to Lintz.