UNITED STATES OF AMERICA
INVESTMENT ADVISERS ACT OF 1940
In the Matter of
GARY L. PITTSFORD,
|ORDER INSTITUTING A PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDING PURSUANT TO SECTIONS 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, MAKING FINDINGS, AND IMPOSING SANCTIONS AND CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative and cease-and-desist proceeding be and hereby is instituted pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Gary L. Pittsford ("G.Pittsford").
In anticipation of the institution of this proceeding, G.Pittsford has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings 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 the Commission's findings set forth in paragraphs III. A. and III. B., which are admitted, G.Pittsford, by his Offer of Settlement, consents to the entry of this Order Instituting A Public Administrative and Cease-and-Desist Proceeding Pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Sanctions and Cease-and-Desist Order ("Order").
Accordingly, IT IS HEREBY ORDERED that a proceeding pursuant to Sections 203(f) and 203(k) of the Advisers Act be, and hereby is, instituted.
On the basis of this Order and the Offer of Settlement submitted by G.Pittsford, the Commission makes the following findings:
A. G.Pittsford, age 52, and a resident of Anderson, Indiana, has been the sole shareholder, president and director of G.L. Pittsford & Associates, Inc., since at least 1983. Since 1980, G.Pittsford has also been the president and one of two directors of Sulphur Implement Corporation.
B. G.L. Pittsford & Associates, Inc. ("Pittsford") (File No. 801-19294), an Indiana corporation, had its principal place of business in Indianapolis, Indiana. It registered with the Commission as an investment adviser on July 22, 1983. Pittsford began managing clients' assets in 1986. In 1997, Pittsford provided investment management services on a discretionary basis to approximately 100 clients with accounts having an aggregate market value of approximately $42.1 million in assets under management and financial planning services to approximately 300 to 400 clients on an hourly or fixed-fee basis. Pittsford withdrew its registration as an investment adviser, effective December 18, 1998.
C. Sulphur Implement Corporation ("SIC") is an Indiana privately-held corporation, with its principal place of business in Sulphur Springs, Indiana, that sells farm equipment and implements.
D. This proceeding involves violative conduct of G.Pittsford, acting through his wholly-owned registered investment adviser, Pittsford, including certain misleading statements and failure to disclose material information by G.Pittsford to certain advisory clients concerning their investments in SIC.
E. SIC was founded in 1980 by a small group of initial investors, including G.Pittsford, his father and brother. From 1980 to the present, SIC has raised approximately $4.4 million in a series of private placements of common stock and promissory notes. Almost all of this money has been raised from investment advisory clients of Pittsford. From at least 1988 to the present, SIC has had operating losses every year, and needed the investors' funds raised by Pittsford to continue to operate.
F. In July 1993, G.Pittsford, Pittsford, and SIC resolved a dispute with two SIC shareholders, who were also formerly Pittsford's advisory clients, by promising to redeem their shares of SIC stock under a payment schedule ("1993 redemption agreement"). Under the 1993 redemption agreement, G.Pittsford, Pittsford, and SIC agreed to jointly and severally pay the SIC shareholders a total of $398,000, not including interest. Between 1993 and the present, SIC made redemption payments of approximately $120,879 towards the 1993 redemption agreement. G. Pittsford, Pittsford, and SIC remain jointly and severally liable for approximately $325,000, plus interest, under this agreement.
G. In November 1994, G.Pittsford, Pittsford, and SIC resolved another dispute with two SIC shareholders who were also former Pittsford advisory clients by promising to redeem their shares of SIC under a payment schedule ("1994 redemption agreement"). Under the 1994 redemption agreement, G.Pittsford, Pittsford, and SIC agreed to jointly and severally pay a total of $398,600. Between 1994 and the present, SIC paid approximately $221,750 towards the 1994 redemption agreement. G.Pittsford, Pittsford, and SIC remain jointly and severally liable for approximately $195,000, plus interest, under this agreement.
H. Between approximately July 1994 and December 1997 (the "relevant period"), G.Pittsford caused four of Pittsford's advisory clients to invest approximately $1.2 million in unregistered common stock and promissory notes of SIC without adequately disclosing the material conflicts of interest arising from G.Pittsford's and Pittsford's financial interests in and relationship with SIC. Due to these interests in and relationship with SIC, G.Pittsford and Pittsford had a material conflict of interest in recommending investments in SIC to their clients. In particular, G.Pittsford failed to adequately disclose to Pittsford's SIC clients that:
1. Pittsford, G.Pittsford and SIC had jointly and severally agreed to pay for the redemption of SIC stock under the 1993 and 1994 redemption agreements in the aggregate amount of $796,600, and a substantial portion of those redemption obligations remained unpaid;
2. SIC needed to raise substantial funds from investors in order to pay for the SIC stock redemption obligations under the 1993 and 1994 redemption agreements, and to the extent that new investor funds enabled SIC to make partial payments on the redemption agreements, the financial obligations of Pittsford and G.Pittsford were reduced; and
3. G.Pittsford was president and one of two directors of SIC, and exercised effective control over it.
I. Beginning in 1986 and continuing through the relevant period, Pittsford's quarterly statements, sent to its advisory clients, reported the value of SIC stock at $200 per share, which was the original purchase price the clients paid for the shares. The value was reported in a column entitled "Current Value." This column generally reported the current market value based on available market quotations. However, Pittsford did not disclose that the listed value of SIC stock reflected the original purchase price, and not current market value. SIC has always been a closely-held stock and has never been publicly traded. Market quotations have never been available for SIC stock. Throughout the relevant period, the book value of the stock was at all times substantially less than $200 per share, and SIC never made an operating profit. Accordingly, it was misleading to value the stock at $200 per share. G.Pittsford was aware that SIC stock was valued at the original purchase price of $200 per share on quarterly client account statements.
J. Prior to December 1997, Pittsford had not filed an amended Form ADV since November 1992, despite material changes in information. During the relevant period, Pittsford filed, on an annual basis, Forms ADV-S that incorrectly certified that it was not required to amend its Form ADV during that period. Between at least 1994 and 1997, Pittsford's Form ADV failed to adequately disclose its and G.Pittsford's material conflict of interest created by the 1993 and 1994 redemption agreements, and G.Pittsford's effective control over SIC as president, director and shareholder. G.Pittsford, as Pittsford's president, was responsible for completing Pittsford's disclosure documents and signed each of the reports and applications submitted to the Commission.
K. Section 206(1) of the Advisers Act prohibits an investment adviser from employing any device, scheme or artifice to defraud any client or prospective client. Section 206(2) prohibits an investment adviser from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.
L. To establish a violation under Sections 206(1) and 206(2) it must be demonstrated that misstatements or omissions were material. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 200 (1963). A fact is considered material if there is a substantial likelihood that a reasonable investor would consider it important. Basic Inc. v. Levinson, 485 U.S. 224, 233 (1988). An investment adviser has a duty to disclose to its clients all material information which might incline an investment adviser to render advice which is not disinterested. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. at 191-92.
M. During the relevant period, G.Pittsford caused and willfully aided and abetted Pittsford's violations of Sections 206(1) and 206(2) of the Advisers Act by knowingly providing assistance to Pittsford's conduct as alleged in paragraphs III. H. and III. I. above.
N. During the relevant period, G.Pittsford willfully violated Section 207 of the Advisers Act by falsely certifying on Pittsford's Forms ADV-S that no amendment to its Form ADV was necessary when it was, as alleged in paragraph III. J. above.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions set forth in the Offer of Settlement submitted by G.Pittsford.
Accordingly, IT IS HEREBY ORDERED that:
By the Commission.
A. Pursuant to Section 203(k) of the Advisers Act, G.Pittsford cease and desist from committing or causing any violations and any future violations of Sections 206(1), 206(2), and 207 of the Advisers Act;
B. G.Pittsford shall be, and hereby is, censured;
C. G.Pittsford shall be, and hereby is, barred from association with any investment adviser with the right to reapply for association after one year from the date of this Order to the Commission or appropriate self-regulatory organization; and
D. G.Pittsford shall, within thirty days of the date of this Order, pay a civil money penalty in the amount of $5,000 to the United States Treasury. Such payments 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 U.S. Securities and Exchange Commission; (C) sent by certified mail to the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (D) submitted under cover letter which identifies G.Pittsford as the Respondent in this proceeding, the file number of this proceeding and the Commission's case number, a copy of which cover letter and money order or check shall be sent to Mary E. Keefe, Regional Director, Securities and Exchange Commission, Midwest Regional Office, 500 W. Madison Street, Suite 1400, Chicago, Illinois, 60661.
|Home | Previous Page||