UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
On February 22, 2000, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against All-Tech Direct, Inc. f/k/a All-Tech Investment Group, Inc. ("All-Tech"), Harry Lefkowitz ("Lefkowitz"), Mark Shefts ("Shefts"), Lisa Esposito ("Esposito"), Ralph Zulferino ("Zulferino"), David Waldman ("Waldman"), Adam Leeds ("Leeds"), and Barry Parish.
All-Tech has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. 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 without admitting or denying the findings contained herein, except for the jurisdiction of the Commission over All-Tech and over the subject matter of these proceedings, which are admitted, All-Tech consents to the entry of the findings, a cease-and-desist order, compliance with undertakings and the imposition of the remedial sanctions set forth herein.
On the basis of this Order and the Offer submitted by All-Tech, the Commission finds that:1
A. All-Tech is, and was during the relevant period, a broker-dealer registered with the Commission and incorporated under the laws of the State of Delaware. Ninety-six percent of All-Tech is owned by Rushmore Financial Services, Inc. ("Rushmore"), a company incorporated under the laws of the State of Delaware. All-Tech offers day-trading services to customers through its principal office and fourteen branches throughout the United States and through direct line electronic access similar to an internet connection.
OTHER RELEVANT RESPONDENTS
B. Mark Shefts ("Shefts"), 42, is, and was during the relevant period, a registered representative and President of All-Tech. Shefts owns, and owned during the relevant period, two percent of All-Tech directly and another 48 percent of All-Tech indirectly through his ownership of Rushmore. Shefts works in All-Tech's headquarters in Montvale, New Jersey, and resides in Tuxedo Park, New York.
C. Harry Lefkowitz ("Lefkowitz"), 43, is, and was during the relevant period, Vice-President of Operations for All-Tech and supervisor of All-Tech's back office, including the margin department, and branch office operations. Lefkowitz works in All-Tech's headquarters in Montvale, New Jersey and resides in Goshen, New York.
D. Lisa Esposito ("Esposito"), 34, is, and was during the relevant period, employed by All-Tech as a supervisor of its margin department at the firm's headquarters in Montvale, New Jersey. She resides in Garnerville, New York.
E. Ralph Zulferino ("Zulferino"), 40, is, and was during the relevant period, an All-Tech registered representative, and the branch office manager of All-Tech's Edison, New Jersey, branch office. He resides in Marlboro, New Jersey.
F. David Waldman ("Waldman"), 58, resides in Monsey, New York and was employed by All-Tech from approximately February through August 14, 1998. During this period, Waldman was an associated person, although he did not have a formal title. Waldman is an attorney.
G. Adam Leeds ("Leeds"), 31, resides in San Diego, California and was a registered representative in All-Tech's San Diego branch office from January 20, 1998 until June 25, 1999.
ALL-TECH'S UNLAWFUL EXTENSION OF MARGIN CREDIT AND
H. Throughout 1998, when the equity in certain margin accounts held by day-trading customers fell below the minimum required by Regulation T ("Regulation T") promulgated by the Board of Governors of the Federal Reserve ("Federal Reserve"), 12 C.F.R. §§ 220.1 - 220.12, All-Tech, directly or indirectly, extended uncollateralized loans from the accounts of associated persons to those customers. The customers who received these loans could not otherwise cover the margin calls issued by All-Tech's clearing firm, Southwest Securities, Inc. ("Southwest"). Regulation T prohibited All-Tech from supplying those customers with additional extensions of credit absent additional collateral.
I. The accounts held by associated persons from which All-Tech extended credit in contravention of Regulation T included: (1) an account in Waldman's name at All-Tech's Montvale headquarters office; and (2) an account at All-Tech's Edison, New Jersey branch in the name of Z-Tech Investments, Inc. ("Z-Tech"), which Zulferino controlled.
J. All-Tech's margin department effected the transactions necessary for All-Tech to make loans out of the Waldman and Zulferino accounts to day-trading customers of All-Tech. Esposito instructed Southwest to transfer sufficient funds from either the Waldman or Zulferino accounts to the account of the customer that had received the margin call by preparing and sending standard "journal forms" to Southwest. Esposito filled in the recipient's account number and the amount to be transferred on the journal form, and Lefkowitz approved the journal form for each such margin call loan. Esposito then faxed the journal form to Southwest, which executed the journal instructions in reliance on Lefkowitz's signature. Before making any loans from the Waldman or Z-Tech accounts, All-Tech required each customer to sign a journal form authorizing Southwest to transfer the borrowed money back to the Waldman or Z-Tech account the next day.
K. In effecting the transactions set forth above, All-Tech's margin department exercised discretion and control over the margin call loans made out of the Waldman and Zulferino accounts. While Waldman and Zulferino owned and/or controlled the funds in the accounts and were sometimes compensated, by the customers who received the loans, for making the loans, they let All-Tech decide when, to whom and on what terms All-Tech could use their accounts to satisfy margin calls to customers. Waldman and Zulferino provided Esposito with pre-signed blank journal forms. Esposito photocopied the pre-signed forms and forwarded the photocopies to Southwest in the manner set forth above. Lefkowitz signed the journal forms authorizing the transfers even though they were obviously photocopies. Zulferino and Waldman thus did not authorize particular loans, learn the identities of borrowers, approve the creditworthiness of particular borrowers, or decide the amounts of any particular loans.
L. From in or about May through August 1998, while Waldman was employed by All-Tech, All-Tech loaned a total of $1,667,270 from Waldman's account to All-Tech customers to satisfy forty-eight margin calls issued under Regulation T. From August 14, through December 4, 1998, while Zulferino was a branch manager of All-Tech, All-Tech loaned a total of $1,941,155 from the Z-Tech account to All-Tech customers to satisfy forty-nine margin calls issued under Regulation T. In addition, an account in the San Diego office in Leeds's name extended six Regulation T margin call loans from April to September 1998.
M. The uncollateralized loans that All-Tech made in 1998 from the Z-Tech, Waldman and Leeds accounts contravened Regulation T and violated All-Tech's own internal written policies.
N. From in or about April through December 1998, All-Tech, while extending credit to customers in connection with securities transactions, failed to establish procedures to assure that for, each account in which credit was extended, the customer received a written statement or statements, at least quarterly, that complied with the requirements of Rule 10b-16 promulgated under the Exchange Act.
O. By reason of the foregoing, All-Tech willfully violated:
1. Regulation T and Section 7(c) of the Exchange Act in that it directly or indirectly extended uncollateralized margin call loans to customers in contravention of Regulation T; and
a. the balance at the beginning of the period; the date, amount and a brief description of each debit and credit entered during such period; the closing balance; and, if interest is charged for a period different from the period covered by the statement, the balance as of the last day of the interest period;
b. the total interest charge for the period during which interest is charged (or, if interest is charged separately for separate accounts, the total interest charge for each such account), itemized to show the dates on which the interest period began and ended; the annual rate or rates of interest charged and the interest charge for each such different annual rate of interest; and either each different debit balance on which an interest calculation was based or the average debit balance for the interest period, except that if an average debit balance is used, a separate average debit balance must be disclosed for each interest rate applied; and
c. all other charges resulting from the extension of credit in that account.
On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer submitted by Respondent All-Tech.
ACCORDINGLY, IT IS ORDERED that:
A. All-Tech be, and hereby is, censured.
B. All-Tech cease and desist, pursuant to Section 21C of the Exchange Act, from committing or causing any violations and any future violations of Regulation T, Section 7(c) of the Exchange Act and Rule 10b-16.
C. All-Tech shall, within thirty days of the entry of this Order, pay a civil money penalty, pursuant to Section 21B of the Exchange Act, in the amount of $225,000 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, Virginia 22312; and (D) submitted under cover letter that identifies All-Tech 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 Zachary Brez, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, New York, NY 10048;
D. All-Tech shall comply with the following enumerated undertakings:
1. Within 60 days of the date of this Order, the Commission will select an independent consultant ("Independent Consultant"), knowledgeable in all aspects of broker-dealer operations, including, but not limited to, Section 7 of the Exchange Act, Exchange Act Rule 10b-16, Regulation T, applicable self-regulatory organization rules and regulations, and other laws, rules, and regulations applicable to margin issues ("Margin Regulations"), to conduct a comprehensive review of, and make findings regarding, All-Tech's internal controls, policies, practices, and procedures designed to achieve compliance with such Margin Regulations;
2. Within 30 days of the date of the selection of the Independent Consultant, All-Tech shall retain the Independent Consultant to: (a) conduct a comprehensive review of, and make findings regarding, All-Tech's internal controls, policies, practices, and procedures designed to achieve compliance with the Margin Regulations (including, but not limited to, policies, practices and procedures that relate to letters of authorization, supervisory review of correspondence and electronic correspondence, and the accuracy, appropriateness and methodology of training materials provided to employees, customers and prospective customers); (b) review any internal controls, policies, practices and procedures that All-Tech has adopted and implemented since the violations described in this Order; (c) determine whether and to what extent there is a need for new, additional or amended policies and procedures designed reasonably to detect and prevent, insofar as reasonably possible, such violations; and (d) make recommendations regarding any additional internal controls, policies or procedures which the Independent Consultant believes are necessary to provide reasonable assurance that All-Tech can detect and prevent the types of violations described in this Order;
3. In conjunction with the Independent Consultant's activities described above, All-Tech shall promptly provide the Independent Consultant upon his or her request with any and all non-privileged documents and other non-privileged information pertaining to All-Tech's brokerage operations, and permit the consultant to meet with any officer, agent, and employee of All-Tech;
4. The Independent Consultant shall promptly commence the duties specified in Paragraph IV.D.2. and, within 120 days of the date the Independent Consultant is retained by All-Tech, the Independent Consultant shall submit, in writing, to All-Tech, with a copy to the staff of the Commission's Division of Enforcement ("Division"), his or her report detailing his or her findings, determinations and recommendations with respect to the matters specified in Paragraph IV.D.2. ("Report");
5. Within 30 days after the transmittal of the Report, All-Tech shall in writing advise the Independent Consultant, with a copy to the staff of the Division, of the recommendations that it has determined to accept and the recommendations that it objects to because All-Tech considers them to be unduly burdensome, costly, or contrary to the Margin Regulations. With respect to any recommendation to which it objects, All-Tech may propose an alternative policy or procedure designed to achieve the same objective or purpose, and with the Independent Consultant's approval, which shall not be unreasonably withheld, implement that alternative in lieu of the Independent Consultant's recommended change or addition;
6. In the event that All-Tech and the Independent Consultant are unable to agree on an alternative proposal, All-Tech shall abide by the recommendation of the Independent Consultant. Within 60 days after the transmittal of the Report, the Independent Consultant shall in writing advise All-Tech, with a copy to the staff of the Division, of his or her decision with respect to any recommendation that All-Tech has proposed to modify;
7. Within 90 days after the transmittal of the Report, All-Tech shall: (a) take all necessary and appropriate steps to adopt and implement all recommendations set forth in the Report or any alternatives accepted by the Independent Consultant; and (b) submit an affidavit to the staff of the Division and the Independent Consultant stating: (i) that All-Tech has remedied any deficiencies in its internal controls, policies, practices, and procedures identified by the Independent Consultant; (ii) stating the means by which such remedy has been accomplished; and (iii) stating further that All-Tech has adopted, implemented, and will maintain any revised or additional internal controls, policies, practices, or procedures recommended in the Independent Consultant's report, or the alternatives acceptable to the Independent Consultant;
8. The Independent Consultant shall review All-Tech's implementation of the recommendations contained in the Report, or such alternatives proposed in writing by All-Tech and accepted in writing by the Independent Consultant or the staff of the Division. This review by the Independent Consultant shall take place on the following two occasions: (a) within 30 days after the passage of one year from the date of the affidavit described in Section IV.D.7.; and (b) within 30 days after the passage of two years from the date of such affidavit. Within 30 days after the completion of each such review, the Independent Consultant shall report in writing his or her findings to the staff of the Division and All-Tech;
9. For good cause shown, and upon receipt of a timely application from the Independent Consultant or All-Tech, the staff of the Division may extend any of the dates set forth above;
10. To ensure the independence of the Independent Consultant, All-Tech: (a) shall not have the authority to terminate the Independent Consultant without the prior written approval of the staff of the Division; (b) shall compensate the Independent Consultant, and persons engaged to assist the Independent Consultant, for services rendered pursuant to this Order at their reasonable and customary rates; (c) shall not have an attorney-client relationship with the Independent Consultant and shall not seek to invoke the attorney-client privilege or any other doctrine or privilege to prevent the Independent Consultant from transmitting any information, reports, or documents to the Commission or its staff;
11. To further ensure the independence of the Independent Consultant, for the period of engagement (including the follow-up reviews specified in Paragraph IV.D.8 above), and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consulting, attorney-client, auditing or other professional relationship with All-Tech, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as representatives of All-Tech. Any firm with which the Independent Consultant is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the staff of the Division, enter into any employment, consulting, attorney-client, auditing or other professional relationship with All-Tech, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as representatives of All-Tech for the period of the engagement and for a period of two years after the engagement is completed.
By the Commission.
1 The findings herein are made pursuant to the Offer submitted by All-Tech and are not binding on any other person or entity in this or any other proceeding.