SECURITIES EXCHANGE ACT OF 1934
Release No. 48635 / October 15, 2003
ADMINISTRATIVE PROCEEDING
File No. 3-11300
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ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Mid-Ohio Securities Corp. ("Mid-Ohio" or "Respondent").
II.
In anticipation of the institution of these proceedings, Mid-Ohio has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, without admitting or denying the findings contained in this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Order"), except as to the Commission's jurisdiction over it and the subject matter of these proceedings, and the findings contained in paragraph III.1 below, which are admitted, Mid-Ohio consents to the entry of this Order as set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds that:
Respondent
1. Mid-Ohio, based in Elyria, Ohio, is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act and was a registered broker-dealer at all relevant time periods alleged herein. Mid-Ohio is a member of the National Association of Securities Dealers, Inc. ("NASD").
2. Mid-Ohio is authorized by the Internal Revenue Service to operate as a custodian for Individual Retirement Accounts ("IRA"). Mid-Ohio's business consists primarily of maintaining IRA accounts for its customers. From April 1, 2001 through August 15, 2001 (the "relevant period"), Mid-Ohio deposited customer funds held for its IRA customers into two escrow accounts at Matrix Capital Bank ("Matrix"), a federally chartered savings and loan association located in Las Cruces, New Mexico. The amount of customer funds Mid-Ohio held on deposit at Matrix ranged from $70,582,520 to $82,063,524 during the relevant period.
Mid-Ohio's Failure to Comply with the Customer Protection Rule
3. Exchange Act Rule 15c3-3(e) requires a broker-dealer to establish a segregated bank account ("Special Reserve Bank Account for the Exclusive Benefit of Customers") in which the broker-dealer deposits funds equal to the amount by which customer credits (i.e. liabilities owed to customers by the broker-dealer) exceed customer debits (i.e. monies owed to the broker-dealer by its customers) ("customer reserve account").
4. During the relevant period, Mid-Ohio maintained approximately $311 in its customer reserve account. However, Mid-Ohio failed to include and classify the customer IRA funds it held at Matrix as customer credits in its customer reserve calculation. Specifically, Mid-Ohio failed to designate as customer reserve accounts the accounts into which IRA funds were deposited at Matrix and classify the deposits therein as liabilities of Mid-Ohio. This resulted in customer reserve account deficiencies ranging from $70,582,210 to $82,063,213 during the relevant period.
5. As a result of the conduct described above, Mid-Ohio willfully violated Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder in that, by use of the mails, or means or instrumentalities of interstate commerce, Mid-Ohio effected transactions in, or induced or attempted to induce the purchase or sale of, securities (other than an exempted security (except a government security) or commercial paper, bankers' acceptances or commercial bills) while not maintaining required customer reserves in its customer reserve account.
Mid-Ohio's Failure to Comply with the Net Capital Rule
6. Exchange Act Rule 15c3-1(a)(1)(i) mandates that a broker-dealer's aggregate indebtedness never exceed its net capital by a ratio of more than 15 to 1.
7. During the relevant period, Mid-Ohio maintained $818,068 to $1,116,470 in net capital. However, Mid-Ohio failed to include and classify the customer IRA funds it held at Matrix as liabilities of Mid-Ohio in its aggregate indebtedness computation, which resulted in a net capital deficiency. Had Mid-Ohio properly included and classified the customer IRA funds as liabilities (customer free credit balances) of Mid-Ohio in its aggregate indebtedness computation, its aggregate indebtedness would have ranged from $71,183,495 to $82,710,159 during the relevant period. Accordingly, Mid-Ohio's ratio of aggregate indebtedness to net capital actually ranged from a high of 87 to 1 in April 2001 to a low of 67 to 1 in May 2001 during the relevant period. As a result, Mid-Ohio maintained deficient net capital ranging from $3,927,498 to $4,425,149 during the relevant period.
8. As a result of the conduct described above, Mid-Ohio willfully violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder in that, by use of the mails, or means or instrumentalities of interstate commerce, Mid-Ohio effected transactions in, or induced or attempted to induce the purchase or sale of, securities (other than an exempted security (except a government security) or commercial paper, bankers' acceptances or commercial bills) while not maintaining minimum net capital.
Mid-Ohio's Failure to Maintain Accurate Books and Records and Comply with the Broker-Dealer Reporting Provisions
9. From April 1, 2001 through July 31, 2001, Mid-Ohio failed to make and keep accurate books and records. Specifically, Mid-Ohio failed to include the $70,582,210 to $77,928,742 in customer IRA funds held at Matrix as liabilities in its general ledger and its aggregate indebtedness and net capital computations.
10. As a result of the conduct described above, Mid-Ohio also willfully violated Section 17(a) of the Exchange Act and Rules 17a-3(a)(2) and (a)(11) thereunder which require that every registered broker-dealer make and keep current books and records reflecting: (1) assets and liabilities, income and expense, and capital accounts; and (2) proof of money balances of all ledger accounts in the form of trial balances, and a record of computation of aggregate indebtedness and net capital.
11. From April 1, 2001 through July 31, 2001, Mid-Ohio filed a June quarterly Financial and Operational Combined Uniform Single Report ("FOCUS report") and April and May monthly FOCUS reports that failed to include and properly classify the $70,582,210 to $77,928,742 in customer IRA funds held at Matrix as liabilities of Mid-Ohio as required by Part II, Item 20 of the liabilities section of the Statement of Financial Condition of the FOCUS reports. As a result, from April to June, Mid-Ohio: underreported its customer reserve requirement by $70,582,210 to $77,928,431 as required by Part II, Item 21 of the customer reserve computation section of the FOCUS reports; and underreported its minimum net capital requirement by $3,927,498 to $4,145,078 as required by Part II, Item 11 of the net capital computation section of the FOCUS reports. In addition, in July Mid-Ohio filed a monthly FOCUS report that failed to state a customer reserve deficiency of $79,938,792.
12. As a result of the conduct described above, Mid-Ohio willfully violated Section 17(a) of the Exchange Act and Rule 17a-5 thereunder, which require registered broker-dealers to file, monthly and quarterly, Part II of the FOCUS report that contain accurate computations of a broker-dealer's customer reserve requirement and net capital.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Mid-Ohio's Offer.
Accordingly, IT IS ORDERED:
A. that Mid-Ohio be, and hereby is, censured;
B. that Mid-Ohio cease and desist from committing or causing any violations and any future violations of Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 15c3-3, 17a-3, and 17a-5 thereunder; and
C. that Mid-Ohio shall, upon the issuance of this Order, pay a civil money penalty in the amount of $25,000 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; (D) submitted under cover letter that identifies Mid-Ohio as the Respondent in this proceedings and the file number of this proceeding; and (E) send a copy of the cover letter and money order or check to Mary Keefe, Regional Director, U.S. Securities and Exchange Commission, Midwest Regional Office, 175 W. Jackson Blvd., Suite 900, Chicago, IL 60604.
By the Commission.Jonathan G. Katz
Secretary