SECURITIES EXCHANGE ACT OF 1934
Release No. 48371 / August 20, 2003
ADMINISTRATIVE PROCEEDING
File No. 3-11230
In the Matter of UBS PAINEWEBBER, INC., Respondent. |
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ORDER INSTITUTING PROCEEDINGS, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute a public administrative proceeding against UBS PaineWebber, Inc. ("PaineWebber" or "Respondent") pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act"). Accordingly, it is ordered that a proceeding pursuant to Section 15(b) of the Exchange Act be, and hereby is, instituted.
II.
In anticipation of the institution of these proceedings, Respondent 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 set forth herein, except as to the Commission's jurisdiction over it and over the subject matter of these proceedings, which are admitted, Respondent has consented to the issuance of this Order Instituting Proceedings, Making Findings and Imposing Remedial Sanctions ("Order"), and to the entry of the findings and the imposition of the remedial sanctions set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds that:
Respondent
1. PaineWebber is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act, headquartered in New York, New York.
Other Relevant Person
2. Enrique E. Perusquia, age 48, was a Senior Vice President at PaineWebber and a registered representative in one of PaineWebber's New York offices from June 1994 to January 1996, and in one of PaineWebber's San Francisco offices from January 1996 to March 1998.1
Summary
3. This matter concerns the failure of PaineWebber reasonably to supervise a former registered representative, Enrique Perusquia, who carried out an extended fraud that caused his clients tens of millions of dollars in losses.
4. Perusquia's fraud involved investing large portions of his clients' funds in a small group of highly speculative gold mining firms while he simultaneously received secret payments from the mining companies, misappropriating money from the client accounts, and engaging in unauthorized margin trading. Perusquia's conduct defrauded several clients, including causing one client (referred to herein as "Client A") to lose at least $68 million.2
5. During the course of Perusquia's fraud, PaineWebber failed to establish procedures reasonably to supervise his trades in certain client accounts. These accounts were established and supervised at PaineWebber. Specifically, as a condition of joining PaineWebber, Perusquia requested an account arrangement similar to the one that he had at his prior brokerage firm. Under that agreement, Perusquia arranged for certain of his clients to hold their funds in accounts at Swiss banks, and in the names of offshore companies that he helped establish. The Swiss banks then set up accounts at PaineWebber in the names of the Swiss banks (which were referred to as omnibus accounts). Perusquia established sub-accounts at the Swiss Banks in the names of off-shore entities controlled by PaineWebber's clients. Perusquia conducted discretionary trades through the omnibus accounts, and then directed the Swiss banks to allocate the trades to specific sub-accounts on behalf of the various offshore entities.
6. Perusquia's supervisors at PaineWebber did not know the actual identities of the clients whose funds were traded through the omnibus trading accounts, and could not determine whether Perusquia's trades were suitable and in accordance with the clients' investment objectives.
The Omnibus Account Structure Managed by Perusquia
7. In 1994, PaineWebber recruited Perusquia from another brokerage firm to join PaineWebber's international private accounts group in New York. Perusquia specialized in handling the accounts of high net worth individuals and families, primarily clients in Mexico. Perusquia brought with him to PaineWebber several large individual client accounts, including Client A.
8. At Perusquia's request, and in order to accommodate the wishes of Client A as related by Perusquia, PaineWebber agreed to enter into a unique referral agreement with a Swiss bank ("Bank A"), in an effort to replicate the account structure that Perusquia used at his prior brokerage firm. The agreement provided that PaineWebber would refer certain high net worth individuals to Bank A, and that PaineWebber would act as the exclusive agent for buying or selling securities and other investments for these individuals, but that Bank A would act as the custodian of all securities and funds pertaining to these individuals.
9. Pursuant to the referral agreement, Bank A opened an omnibus brokerage account at PaineWebber in the name of Bank A. The omnibus account had several subaccounts opened at Bank A in the name of the various offshore companies that Perusquia helped establish (together, the "Omnibus Clients"). Other than Perusquia and his registered sales assistant, no one at PaineWebber knew the identities of the sub-account holders. Perusquia or his assistant provided Bank A daily recaps of the trades carried out for each customer in the omnibus account, and Bank A assigned the debits and credits resulting from these trades to each customer's Bank A account pursuant to these instructions.
10. The referral agreement provided that Perusquia and his registered sales assistant retained discretionary control over trades placed on behalf of the Omnibus Clients and stated that the bank was entitled to "rely conclusively" on Perusquia's instructions. Moreover, the referral agreement contained as an attachment a trading authorization form to be entered into between the client and Bank A, the language of which Bank A negotiated with PaineWebber. The referral agreement assigned PaineWebber the responsibility for supervising Perusquia's conduct pursuant to the referral agreement.
11. In June 1994, Perusquia's prior brokerage firm transferred certain assets that had been managed by Perusquia to Bank A, including funds and securities of Client A. Perusquia directed that he receive all account statements and correspondence relating to the clients' accounts, rather than having such documents sent to the clients directly. (Perusquia also maintained control over approximately $19 million of Client A's investments held at another Swiss bank, Bank B).
12. In January 1996, Perusquia transferred to one of PaineWebber's San Francisco offices, where he continued to make discretionary trades on behalf of the clients in the Bank A omnibus account. At the end of 1996, PaineWebber closed the Bank A omnibus account, opened an omnibus account for another Swiss Bank ("Bank C") and transferred the assets to that bank, where Perusquia continued to make discretionary trades until March 1998. However, PaineWebber did not enter into a written referral agreement with Bank C that outlined the rights and responsibilities of the parties until March 1997. The powers of attorney that granted Perusquia trading authority over the clients' assets made clear that Bank C would not supervise Perusquia with respect to trades made in the omnibus account.
Perusquia's Fraud
13. While at PaineWebber, Perusquia used large portions of the PaineWebber Omnibus Clients' funds to buy stocks and convertible bonds in three gold mining companies. Perusquia accomplished many of the purchases by submitting to the Swiss banks letters that contained unauthorized cut-and-paste, or trace-over, signatures purporting to be client authorizations to transfer funds to buy securities.
14. These gold mining securities were highly speculative. For example, although one of the companies had emerged from bankruptcy in February 1992, it did not have reported operating income until it merged with another firm in 1996. The merged entity filed for bankruptcy in December 1997.
15. While at PaineWebber, Perusquia received at least $1.02 million in unauthorized and undisclosed cash commissions directly from these issuers, as well as additional undisclosed and unauthorized commissions in the form of restricted stock valued at $162,147 at the time of issuance.
16. Perusquia also caused unauthorized transfers of funds from Client A's accounts by means of letters of authorization to the Swiss custodian banks, onto which were affixed a trace-over or cut-and-paste signature. Perusquia admitted in his guilty plea that between approximately June 1994 and 1997, he misappropriated over $1.3 million from this client. Perusquia used forged client authorizations and took other steps to conceal his fraud from his supervisors.
17. Perusquia caused many of the forged letters to be sent by facsimile from both PaineWebber and offsite fax machines.
18. In addition, Perusquia traded on margin in Client A's accounts at the Swiss custodian banks without authorization. Perusquia accomplished these margin transactions by forging the client's signature on powers of attorney, which purported to authorize Perusquia to engage in margin trading in Client A's accounts at the Swiss custodian banks and to make disbursements of cash to third parties. As a result of Perusquia's unauthorized margin trading, when Perusquia left PaineWebber in 1998, Client A had over $7 million in margin debt.
19. Rather than have the omnibus account statements sent directly to his clients, Perusquia directed the banks to send the statements directly to Perusquia. In order to conceal his fraud, Perusquia then prepared and provided the clients with false and misleading monthly account statements. Those statements variously inflated the cash balance; included the correct securities holdings, but misrepresented the value of some of the securities in the accounts; omitted to list some of the securities in the accounts and listed others that were not actually held in the accounts; and omitted to disclose the unauthorized margin trading and margin debt owed.3
20. In early 1998, Perusquia's fraud came to light when an associate of Client A's began to question the monthly account summaries. In particular, the associate noted that one of the companies listed as having value was in bankruptcy, and other stocks also appeared to be listed at values higher than their current market values. At a meeting with Client A in March 1998 to discuss these discrepancies, Perusquia admitted that he had lost virtually all of the client's money, purportedly because of poor-performing investments in gold mining stocks. Perusquia claimed that the investments had gone "wrong." In addition, Perusquia admitted to sending Client A false monthly account statements. Perusquia, rather than respond to PaineWebber's questions about his activities, resigned.
PaineWebber Failed Reasonably to Supervise Perusquia
21. Section 15(b)(4)(E) of the Exchange Act authorizes the Commission to sanction any broker-dealer who 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 its supervision.
22. Section 15(b)(4)(E) provides a defense against a charge of failure to supervise where the respondent has "established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, so far as practicable," violations of the federal securities laws.
23. In this case all elements are met. Perusquia pled guilty to committing securities fraud in connection with his management of his clients' funds in the omnibus accounts. PaineWebber was responsible for supervising Perusquia because these violations took place, in part, while he was a registered representative at PaineWebber.
24. PaineWebber failed to establish procedures, and a system for implementing such procedures, which would reasonably be expected to prevent and detect problems with Perusquia's management of the assets of the Omnibus Clients. PaineWebber did not have a procedure to ensure that Perusquia's supervisors knew basic information about the clients whose assets were traded in the accounts, such as their identity, contact information for the clients, their asset bases, their investment objectives or the suitability of the trades placed on their behalf by Perusquia. Nor did the firm establish a procedure to ensure that Perusquia's supervisors received and reviewed account statements or other trading summaries for the Omnibus Clients. In addition, PaineWebber allowed Perusquia to conduct the trades for the clients through Bank C for 15 months without any written referral agreement that outlined the rights and responsibilities of the parties.
Remedial Measures
In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent.4
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions that are set forth in the Offer submitted by Respondent:
IT IS ORDERED THAT pursuant to Section 15(b) of the Exchange Act, PaineWebber shall be and hereby is censured;
IT IS FURTHER ORDERED THAT pursuant to Section 21B of the Exchange Act, PaineWebber shall pay a civil money penalty of $500,000 to the United States Treasury within 10 days of the entry of this Order. Such payment 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 Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (4) submitted under cover letter which identifies the Respondent in this proceeding, and the file number of these proceedings. A copy of the cover letter and money order or check shall be sent to Helane L. Morrison, District Administrator, Securities and Exchange Commission, 44 Montgomery Street, 11th Floor, San Francisco, California 94104.
By the Commission.
| Jonathan G. Katz Secretary |
1 Perusquia has been the subject of three law enforcement proceedings relating to conduct that occurred, in part, while he was associated with PaineWebber, and which is referenced herein. On May 20, 2002, the United States District Court for the Northern District of California entered a criminal judgment against Perusquia, pursuant to his plea of guilty to violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. United States v. Enrique E. Perusquia, Case No. CR02-40013 CW. The Court sentenced Perusquia to 78 months' incarceration, entered a $68 million restitution order and imposed certain special conditions, including a condition that Perusquia "shall not be employed in the securities field or employed with any financial institution."
On June 5, 2002, the United States District Court for the Northern District of California entered default against Perusquia in an action filed by the Commission alleging violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act, and Rule l0b-5 thereunder. Securities and Exchange Commission v. Enrique E. Perusquia, Case No. C 02-00540 CW (EDL).
On September 16, 2002, the SEC issued an Order Instituting Public Administrative Proceedings against Perusquia pursuant to Section 15(b)(6) of the Exchange Act based on Perusquia's guilty plea in U.S. v. Perusquia. In the Matter of Enrique E. Perusqia, Admin Proc. File No. 3-10890.
On October 31, 2002, the District Court entered a final judgment against Perusquia in which the Court (1) issued an injunction against Perusquia from committing future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act; (2) ordered him to disgorge $3.6 million; (3) required him to pay pre-judgment interest of $1.6 million; and (4) imposed a civil penalty of $3.6 million against Perusquia.
On November 20, 2002, the Administrative Law Judge entered an Order barring Perusquia from associating with a broker-dealer.
2 The $68 million figure includes more than $20 million in losses from transactions that Perusquia executed while employed as a registered representative at his prior brokerage firm. Most of the client's losses resulted from Perusquia's use of forgeries to make unauthorized purchases of speculative gold companies and the subsequent collapse of the companies' share prices.
3 For example, from December 31, 1996 through January 31, 1998, the false statements sent by Perusquia depict Client A's total investments as steadily increasing in value, to an ending value of $151 million, as of January 31, 1998. Statements later obtained directly from Banks B and C show Client A's accounts fluctuating during this period, but generally declining, from $29 million as of December 31, 1996, to $4 million as of January 31, 1998.
4 In addition, in 2001, PaineWebber entered into settlements with several clients, including Client A, who had filed arbitration claims arising out of Perusquia's conduct. Bank A and Perusquia's prior brokerage firm separately settled their claims.