UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37531 / August 6, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9054 ___________________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : ADMINISTRATIVE REFCO SECURITIES, INC. : PROCEEDING, MAKING : FINDINGS, IMPOSING Respondent. : REMEDIAL SANCTIONS AND : ISSUING CEASE-AND-DESIST : ORDER : ___________________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") be instituted against Refco Securities, Inc. ("RSI"). II. In anticipation of the institution of this proceeding, RSI has submitted an Offer of Settlement 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 RSI admits the jurisdiction of the Commission over it and over the subject matter of this proceeding, RSI consents to the entry of this Order Instituting Public Administrative Proceeding, Making Findings, Imposing Remedial Sanctions and Issuing Cease- and-Desist Order ("Order") set forth below. Accordingly, IT IS ORDERED that a proceeding pursuant to Sections 15(b), 19(h) and 21C of the Exchange Act be, and hereby is, instituted. ==========================================START OF PAGE 2====== III. On the basis of this Order and the Offer of Settlement submitted by RSI, the Commission finds that:-[1]- A. Respondent RSI, a New York corporation, is a broker-dealer registered with the Commission (File No. 8-26718). During the relevant time period, RSI effected transactions in U.S. Treasury securities and options thereon through its government securities options trading desk. B. Background 1. Between 1987 and 1991, Steven D. Wymer ("Wymer"), the owner of two former California-based registered investment advisory firms, perpetrated a series of schemes by which he defrauded his clients of more than $80 million.2 RSI was one of several broker-dealers at which Wymer maintained customer accounts in connection with his investment advisory business. 2. As stated more fully below, Wymer's violative conduct through RSI involved the following: (1) between August 1987 and May 1988, two RSI government securities options traders (the "Traders"3) executed orders and processed transactions that ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to RSI's Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. 2 As a result of his conduct, on February 7, 1992, Wymer was permanently enjoined from future violations of the federal securities laws. SEC v. Institutional Treasury Management, Inc., Denman & Company and Steven D. Wymer, Civil Action No. 91-6715 MRP (Ex) (C.D. Cal.). Wymer was also barred from the securities industry on June 9, 1992. Steven D. Wymer, Advisers Act Rel. No. 1315 (June 9, 1992). On September 29, 1992, Wymer pleaded guilty to 9 felony counts and was ordered to disgorge all of his assets and pay restitution and prejudgment interest in the amount of $209 million. He was originally sentenced to a 14 year and 7 month prison term, which was subsequently reduced to 7 years and 3 months. 3 Simultaneous with the entry of the Order, the Commission accepted an Offer of Settlement from one of the Traders wherein he, without admitting or denying the findings contained in the Commission's Order against him, consented to an order to cease and desist from causing any violation ==========================================START OF PAGE 3====== resulted in Wymer's misappropriation of approximately $2.9 million in premiums due his clients from government securities options trading directed by Wymer (hereinafter referred to as "Wymer's Advisory Fee Scheme"); and (2) between July 1988 and November 1991, Wymer used an RSI registered representative ("RR") to assist him in concealing his misappropriation of his clients' funds. Specifically, RR misrepresented to certain of Wymer's clients' auditors the balances that such clients held in accounts at RSI. Further, between August 1987 and May 1988, RSI failed to make, keep current and preserve accurate books and records and failed to provide its customers with accurate trade confirmations regarding government securities options trading. In addition, between July 1988 and November 1991, RSI failed reasonably to supervise RR. C. Violations Relating to Wymer's Advisory Fee Scheme 1. Wymer's Advisory Fee Scheme Between August 1987 and May 1988, Wymer conducted a scheme that resulted in his misappropriation of approximately $2.9 million in premiums due his clients from government securities options trading at RSI. As part of and in furtherance of his scheme, Wymer instructed the Traders to cause RSI to pay directly to him between 20% and 90% of the premiums from certain options transactions executed on behalf of Wymer's clients. Wymer informed the Traders that these payments constituted the remittance of advisory fees owed to him by the clients and which his clients purportedly had authorized to be paid to him. In reliance upon authorization forms provided by Wymer to RSI and purportedly signed by Wymer's clients, RSI paid Wymer his claimed fees directly out of the premiums of specific option transactions.4 RSI then deposited the balance of the premiums into the clients' accounts. The trade confirmations for the transactions reported only the premium amount net of Wymer's purported fees and a price adjusted to reflect the net amount. 2. Books and Records Violations In the course of executing the transactions described in paragraph III.C.1., RSI did not record on its trade tickets the full amount of the premium on options transactions, or future violation of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder. Robert J. Dantone, Exchange Act Rel. No. ________ (______________). 4 The authorizations permitted RSI, "to withdraw and pay funds, at the direction of Steven D. Wymer (advisor) from the undersigned account . . . for the payment of certain management fees or incentive fees or both." ==========================================START OF PAGE 4====== but rather the premium less Wymer's purported fee. Consequently, the trade tickets for these transactions contained inaccurate prices. As a result of this practice, RSI violated Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder by failing to make, keep current and preserve accurate trade tickets. 3. Inaccurate Confirmations In the course of executing the transactions described in paragraph III.C.1., RSI did not provide its customers with confirmations that reflected the full amount of the premiums associated with those transactions. Consequently, RSI did not provide its customers with written notification reflecting the accurate price of such transactions. Instead, RSI's trade confirmations reported a price that was adjusted in accordance with Wymer's purported fees. As a result of this practice, RSI violated Rule 10b-10, as promulgated under Section 10(b) of the Exchange Act, by failing to provide its customers with accurate trade confirmations. D. Violations Relating to RR's Assistance in the Concealment of Wymer's Misappropriation of his Clients' Funds 1. Between July 1988 and November 1991, RR assisted Wymer in concealing his misappropriation of millions of dollars from his clients' accounts. As part of the conduct, RR personally misrepresented to certain of Wymer's clients' auditors the balances that such clients held in accounts at RSI. Specifically, RR signed letters to auditors falsely verifying the portfolio balances of Wymer's clients. 2. As a result of the conduct identified in paragraph III.D.1., RR violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that RR, in the offer or sale of securities, or in connection with the purchase or sale of securities,5 by the use of the means or instruments or instrumentalities of transportation or communication in interstate commerce or by the 5 RR's signing of letters to auditors falsely verifying the portfolio balances of Wymer's clients satisfies the 'in connection with' requirement of Rule 10b-5 of the Exchange Act. See SEC v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) (in Commission actions, "in connection with" requirement is interpreted "as broad and flexible as is necessary to accomplish the statute's purpose in protecting investors."); SEC v. Clark, 915 F.2d 439, 449 n.18 (9th Cir. 1990) ("in connection with" requirement construed more broadly in Commission actions than in private actions). ==========================================START OF PAGE 5====== use of the mails, directly or indirectly, employed devices, schemes or artifices to defraud; obtained money or property by means of, or otherwise made, untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaged in acts, transactions, practices or courses of business which operated or would operate as a fraud or deceit upon any person. 3. As a result of his misappropriation of millions of dollars from his clients' accounts at RSI, Wymer violated Sections 206(1) and 206(2) of the Advisers Act in that Wymer, by use of the means or instrumentalities of interstate commerce, directly or indirectly, employed devices, schemes, or artifices to defraud his clients; and Wymer engaged in transactions, practices or courses of business which operated as a fraud or deceit upon his clients. 4. As a result of the conduct identified in paragraph III.D.1., RR aided and abetted Wymer's violation of Sections 206(1) and 206(2) of the Advisers Act by assisting Wymer in concealing his misappropriation of millions of dollars from his clients' accounts at RSI. E. Failure to Supervise 1. Between July 1988 and November 1991, RSI had supervisory responsibility over RR. As described in paragraph III.D.1., RR violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and aided and abetted Wymer's violation of Sections 206(1) and 206(2) of the Advisers Act by, among other things, signing letters to auditors falsely verifying the portfolio balances of Wymer's clients. 2. Between July 1988 and November 1991, RSI had no written procedures regarding the verification of audit confirmation letters. Rather, RSI had non-written procedures for the handling of audit letters. According to RSI's mail review procedures at the time, audit letters received by RSI were directed to RSI's compliance department and forwarded to RSI's accounting department. 3. Between July 1988 and November 1991, with respect to ordinary mail, in accordance with its compliance procedures, RSI's compliance department opened and reviewed mail before it was forwarded to the ultimate addressee. However, with respect to overnight mail and facsimiles, RSI had no similar procedure. 4. As a registered broker-dealer, RSI failed reasonably to supervise RR with a view to preventing her violations of Section 17(a) of the Securities Act and Section ==========================================START OF PAGE 6====== 10(b) of the Exchange Act and Rule 10b-5 thereunder within the meaning of Section 15(b)(4)(E) of the Exchange Act. RSI also failed reasonably to supervise RR's aiding and abetting of Wymer's violations of Sections 206(1) and 206(2) of the Advisers Act within the meaning of Section 15(b)(4)(E) of the Exchange Act. These failures are summarized as follows: a. RSI failed to establish adequate written procedures for the verification of audit confirmations; and b. RSI failed to establish adequate procedures for the review of incoming facsimiles and overnight mail. IV. RSI has submitted an Offer of Settlement in which, without admitting or denying the findings herein, it consents to the Commission's entry of this Order, which makes findings as set forth above, and orders RSI to cease and desist from committing or causing any violations and any future violation of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder and Rule 10b-10, as promulgated under Section 10(b) of the Exchange Act; imposes a censure; directs RSI to comply with the undertakings described in Section V. below, including the payment of $3,250,000 pursuant to a plan to compensate Wymer's defrauded clients; and orders RSI to pay $250,000 as a civil money penalty. V. The undertakings with which RSI shall comply are as follows: A. RSI undertakes that, within thirty (30) days of the entry of the Order, RSI will supplement its compliance and supervisory policies and procedures as outlined below: 1. Audit Confirmation Procedures -- RSI will establish written procedures for the review and verification of customer audit confirmation letters by accounting personnel. 2. Correspondence Review Procedures -- RSI will establish additional written procedures for the review of incoming mail. Such procedures shall include specific provisions designed for the review of facsimile transmissions and overnight mail. B. RSI undertakes to maintain the modified supervisory and compliance policies and procedures, as well as existing supervisory and compliance policies and procedures, except as they may be inconsistent with, or superseded ==========================================START OF PAGE 7====== by, any new policies or procedures adopted in accordance with Paragraph C. below. C. RSI undertakes to retain, within sixty (60) days of the date of the Order, at RSI's expense, an Independent Consultant ("Consultant"), not unacceptable to the Commission's staff, to conduct a review of, and to report and make recommendations as to RSI's supervisory and compliance policies and procedures, designed to prevent and detect violations of the federal securities laws. The Consultant's review and report are subject to the following procedural dates and conditions: 1. The Consultant's review and report shall focus on, but not be limited to, those subject matters and areas of RSI's operations discussed in Sections III.C.-III.E. above; and shall include a review and assessment of the adequacy of the changes to be implemented by RSI as set forth in Paragraph A. above. RSI further undertakes to cooperate fully with the Consultant in this review, including making such non-privileged records available, as the Consultant may reasonably request; and by permitting and requiring RSI's employees and agents to supply such non-privileged information as the Consultant may request for the Consultant's review. 2. At the conclusion of such review, which in no event shall be more than 120 days after the date of the retention of the Consultant, the Consultant shall submit to RSI a draft report ("Draft Report") concerning whether or not RSI's then existing procedures as established and implemented, are reasonably designed to prevent and detect violations of the federal securities laws, and indicate whether RSI's policies, procedures and practices adequately address the deficiencies described in Sections III.C.-III.E. above. In the event the Consultant determines that there are inadequacies in RSI's policies, procedures and practices, the Consultant's Draft Report shall include recommendations as to new or additional policies or procedures. 3. Within forty-five (45) days of transmittal of the Consultant's Draft Report, RSI shall in writing advise the Consultant of any recommendation which RSI has determined to accept and of any recommendation which RSI has determined to reject. With respect to any recommendation of the Consultant which RSI has rejected, RSI will select ==========================================START OF PAGE 8====== and set forth an alternative policy or procedure designed to achieve the same objective or purpose. With respect to the latter, RSI and the Consultant shall then attempt in good faith to reach agreement on any policy or procedure as to which there is a dispute. 4. Within ninety (90) days after transmittal of the Consultant's Draft Report, RSI shall in writing advise the Consultant of any recommendation which RSI and the Consultant have agreed upon and which RSI has determined to accept. In the event the Consultant and RSI are unable to agree on an alternative proposal, RSI shall abide by the recommendation of the Consultant. 5. The Consultant shall complete the aforementioned reviews and submit a written final report ("Final Report") thereon to RSI and to the Commission's staff within 330 days after the date of the Order. The Final Report shall describe the efforts undertaken by the Consultant to review RSI's supervisory and compliance policies and procedures, shall set forth the Consultant's recommendations, and shall specify those recommendations which have been accepted by RSI and those recommendations as to which there has been agreement as to an alternative policy or procedure. The Final Report shall set forth the alternative policy or procedure selected by RSI and agreed to by the Consultant. 6. Within sixty (60) days of transmittal of the Consultant's Final Report, RSI undertakes to adopt and implement all of the Consultant's recommendations or alternative policies or procedures which have been agreed upon in the Final Report. 7. Within ninety (90) days of transmittal of the Consultant's Final Report, RSI shall submit to the Commission's staff an Affidavit of Compliance setting forth the details of its implementation of the recommendations and accepted alternative policies or procedures contained in the Consultant's Final Report and all other undertakings set forth in Section VI. herein. For good cause shown, the Commission's staff may extend any of the procedural dates set forth above, provided that the Affidavit of Compliance is received within eighteen (18) months from the date of entry of the Order. ==========================================START OF PAGE 9====== D. RSI undertakes that within forty-five (45) days of the entry of the Order, RSI shall submit to the Commission for its approval a plan of distribution ("Plan") for the payment of $3,250,000 to compensate Wymer's defrauded clients. The Plan shall be drafted pursuant to the instructions provided in Appendix A attached to the Order and RSI's Offer of Settlement. Within thirty (30) days of the approval of the Plan by the Commission, RSI shall make payment to Wymer's defrauded clients in accordance with the Plan. Within thirty (30) days of RSI's payment to Wymer's defrauded clients, RSI shall submit to the Commission's staff an affidavit that it has complied with its undertaking to pay $3,250,000 pursuant to a plan to compensate Wymer's defrauded clients. In the event that (1) RSI does not submit the Plan in accordance with instructions in Appendix A within forty-five (45) days of the entry of the Order; or (2) RSI does not make full payment within thirty (30) days of the Commission's approval of the Plan, then RSI consents to the entry of a judgment by a United States District Court compelling RSI to pay the aforementioned $3,250,000, or any portion thereof not paid to the defrauded clients, to Wymer's defrauded clients in accordance with instructions in Appendix A. For good cause shown, the Commission's staff may extend any of the procedural dates set forth in paragraph D. VI. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer of Settlement submitted by RSI and impose the sanctions specified therein. Accordingly, IT IS HEREBY ORDERED that: 1. Pursuant to Section 21C of the Exchange Act that RSI cease and desist from committing or causing any violations and any future violation of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder and Rule 10b-10, as promulgated under Section 10(b) of the Exchange Act; 2. RSI shall be, and hereby is, censured; 3. RSI shall comply with its undertakings as described in Section V. above; and ==========================================START OF PAGE 10====== 4. RSI shall, within seven (7) days of the entry of the Order, pay a civil money penalty in the amount of $250,000 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 to the Comptroller, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (d) submitted under cover letter which identifies RSI as respondent in this proceeding, the file number of this proceeding, a copy of which cover letter and money order or check shall be sent to Clifford C. Hyatt, Pacific Regional Office, Securities and Exchange Commission, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. By the Commission. Jonathan G. Katz Secretary ==========================================START OF PAGE 11====== APPENDIX A I. Participating Client Distributions shall be made only to "Participating Clients." A Participating Client is a client that: (1) is identified in Exhibit A of the attached Revised Proposed Plan to Distribute the Steven D. Wymer Qualified Settlement Fund and Memorandum of Points and Authorities in Support of its Motion for an Order Distributing the Fund ("Wymer Plan"), filed on March 8, 1994 and approved by the Court on April 4, 1994, SEC v. Institutional Treasury Management, Inc., Denman & Company and Steven D. Wymer, Civil Action No. 91-6715 RJK (Ex) (C.D. Cal.); and (2) agrees to offset any subsequent private action recovery against RSI by the amount of its distribution. II. Method of Distribution The Plan shall distribute the $3,250,000 in a manner consistent with the distribution method used in the Wymer Plan. The following formula shall be applied: D - R S = ________ X $3,250,000 TL S = Participating Client Share of Distribution. D = Participation Client's Net Deposits as indicated in column V in Exhibit A of the Wymer Plan. R = Total funds recovered by the Participating Client in any litigation or settlement of any claim relating to the Participating Client's relationship with Wymer, including, without limitation, any claims arising from Wymer's fraudulent conduct, as of the date the Plan developed pursuant to this Order is approved by the Commission. TL= Total Net Funds Lost (D - R) of all Participating Clients. ==========================================START OF PAGE 12====== III. Limitations on Share of Distribution The Participating Client's Share of Distribution shall be reduced by the amount of any prior settlement with RSI of any claim relating to Wymer's fraudulent conduct. Such amounts deducted from the Participating Client's Share of Distribution shall be distributed, pro rata, to those Participating Clients who have not settled with RSI. Under no circumstances shall a Participating Client be permitted to a Share of Distribution that exceeds its total net funds lost (D - R).