UNITED STATES OF AMERICA
|In the Matter of
F. XAVIER SAAVEDRA,
|ORDER INSTITUTING PUBLIC
PROCEEDINGS, MAKING FINDINGS,
AND ISSUING CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate to institute public cease-and-desist proceedings pursuant to Section 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), against F. Xavier Saavedra ("Saavedra").
In anticipation of the institution of these proceedings, Saavedra has submitted an Offer of Settlement ("Offer") to the Commission, 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 in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and over the subject matter of this proceeding, which is admitted, Saavedra has consented to the entry of this Order Instituting Public Proceedings, Making Findings, and Issuing Cease-and-Desist Order ("Order").
Accordingly, IT IS ORDERED that cease-and-desist proceedings pursuant to Section 203(k) of the Advisers Act be, and hereby are, instituted against Saavedra.II.
On the basis of this Order and the Offer, the Commission makes the following findings:1
A. Brian W. O'Connor & Co. ("BWOC") was an investment adviser registered with the Commission. Saavedra, an officer of BWOC, was a cause of certain antifraud violations of the Advisers Act that BWOC committed through the actions of its president and principal, Brian W. O'Connor ("O'Connor"). From January 1997 through June 1998, O'Connor misappropriated funds from the accounts of two advisory clients and covered up the misappropriations with false account documents. On one occasion, Saavedra sent false account information to the representative of one of the two defrauded clients. This false account information concealed previous misappropriations and enabled O'Connor to take additional client funds. Saavedra knew or should have known that the account information Saavedra himself sent to the client representative was false. Saavedra also was a cause of a violation of the Advisers Act by BWOC arising from its maintenance of the false account statement as a record required by the Advisers Act.
B. Saavedra is the former executive vice president of BWOC. Currently, Saavedra is the president of Centurion Asset Management ("Centurion"), an unregistered investment adviser located in New York, New York. Centurion succeeded to BWOC's business after the events described in this Order. Saavedra resides in Islip, New York.
RELATED PERSON AND ENTITIES
C. O'Connor was the president and owner of BWOC during the relevant period. O'Connor has pleaded guilty to federal criminal charges of bank and mail fraud.
D. BWOC was registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act from January 10, 1994 through June 10, 1998, the effective date of BWOC's voluntary withdrawal from registration.
E. The Trust is a testamentary trust over which O'Connor was co-trustee. BWOC, through O'Connor, provided investment advice for a fee to the Trust and managed its financial affairs from 1986 through at least September 1998.
F. From January through June 1998, O'Connor instructed Saavedra to sell a substantial portion of the securities in the Trust's brokerage account. Pursuant to these instructions, Saavedra placed eighteen separate orders directing the brokerage firm to sell nearly 90% of the securities in the account. The total proceeds were approximately $417,000.
G. Once these securities had been liquidated, O'Connor directed the custodian bank to wire $330,000, and personally wrote checks transferring an additional $71,000, into the Trust's checking account at another bank. O'Connor then transferred a total of $384,000 from this account into the checking account of B.W. O'Connor & Associates ("Associates"), an entity controlled by O'Connor. O'Connor also transferred, by check, an additional $9,000 from the Trust's custodian bank account directly into the Associates account. O'Connor then used some of the Trust's funds to repay $240,000 to an advisory client that O'Connor previously had defrauded. O'Connor also used the Trust's funds to pay for the ongoing operations of BWOC, personal telephone bills, and association dues. At O'Connor's direction, Saavedra withdrew the funds from Associates' account to pay for these expenses. In total, O'Connor misappropriated $393,000 from the Trust.
H. Neither BWOC, O'Connor, Saavedra, nor anyone else told the Trust's co-trustee or any of the Trust beneficiaries about the sales of Trust securities or the transfer of the proceeds from the sales away from the Trust's account while they were occurring. Instead, these transactions were concealed through an account statement that falsely showed the liquidated securities still to be in the account.
I. In early April 1998, at O'Connor's direction, Saavedra generated and arranged to be mailed to the Trust's representative (who was also the co-trustee and a beneficiary) a quarterly account statement for the period from January 1, 1998 through March 31, 1998. This account statement was false because it showed that the account still held a substantial portfolio of specific securities, and because it valued the Trust's account as of March 31, 1998 at $500,511. In fact, 90% of the reported securities were no longer in the account because they had been sold, and the account was worth only approximately $146,000 on March 31, 1998.
J. Along with the false account statement, at O'Connor's direction, Saavedra prepared portions of and signed a cover letter in his capacity as BWOC's executive vice president. This cover letter falsely stated that total performance was up 9.21% for the quarter and misleadingly compared the account's equity performance, favorably, to both the Dow Jones Industrial Average and the Standard & Poor's 500. At O'Connor's request, Saavedra arranged for the account statement and cover letter to be mailed to the Trust's representative.
K. The March 31, 1998 account statement and cover letter were materially false and misleading because they stated a false account balance, listed as current holdings numerous securities that had been sold, made positive statements about the account's performance, failed to disclose that the bulk of securities in the account had been liquidated, and generally made it appear that the Trust's assets were being managed profitably. The false information assisted the fraudulent activity by concealing the misappropriations during the first quarter of 1998 and by enabling O'Connor to transfer additional funds from the account. Of the total $393,000 that O'Connor misappropriated, O'Connor obtained approximately $59,000 after Saavedra issued the false statement and letter. The Trust, which was worth approximately $467,000 in January 1998, held cash and securities worth only approximately $38,000 by September 1998.
L. Saavedra knew or should have known that the account information that he sent to the Trust's representative was materially false and misleading, and that it would therefore assist O'Connor in fraudulent activity. Before sending the information, Saavedra personally directed the sales that resulted in the liquidation of 90% of the securities in the account's portfolio. He also had access to, but consciously disregarded, other information (including bank account information and information concerning certain problems in other BWOC client accounts) that reasonably should have led him to question whether improper activity was occurring with regard to the Trust's account. Saavedra thus knew or should have known that the account information he sent to the Trust's representative was materially false and misleading.
M. Sections 206(1) and (2) of the Advisers Act make it unlawful for any investment adviser to employ any device, scheme, or artifice to defraud any client or prospective client or to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. At least one court has held that scienter is necessary to violate Section 206(1), but scienter is not required for a violation of Section 206(2). SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963); Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). Sections 206(1) and (2) of the Advisers Act also imposes a statutory fiduciary duty for investment advisers to act for the benefit of their clients, including the duty to employ reasonable care to avoid misleading clients. Id. at 194; Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979); Chancellor Capital Management, Inc., Investment Advisers Act Release No. 1447, 57 SEC Docket 2489, 2500 (October 18, 1994).
N. BWOC defrauded an advisory client, the Trust, through the misappropriations and distribution of false account information described above. Accordingly, BWOC violated Sections 206(1) and 206(2) of the Advisers Act.
O. As described in detail in Paragraph II.L above, Saavedra knew or should have known that he sent a client representative a false account statement and a misleading cover letter, and that this false information assisted the ongoing fraud. Accordingly, Saavedra was a cause of BWOC's violations of Sections 206(1) and 206(2) of the Advisers Act.
P. Section 204 of the Advisers Act provides that investment advisers that make use of the mails or any means or instrumentality of interstate commerce in connection with their advisory business shall make and keep for prescribed periods certain books and records identified in Rule 204-2(a)(12), including records that reflect the value, holdings, purchases and sales in client accounts. The information in an adviser's books and records, and in its reports to clients, must be true and accurate. Scienter is not required to establish a violation of these provisions. See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992).
Q. BWOC maintained the false account statement described in Paragraph II.I above as the record of the value, holdings, purchases, sales, and transactions in the Trust's account. Accordingly, BWOC violated Section 204 of the Advisers Act and Rule 204-2(a)(12) thereunder.
R. At O'Connor's direction, Saavedra generated and was responsible for maintaining the false statement at issue. Accordingly, Saavedra was a cause of BWOC's violation of Section 204 of the Advisers Act and Rule 204-2(a)(12) thereunder.III.
In view of the foregoing, the Commission finds that Saavedra was a cause of BWOC's violations of Sections 204, 206(1) and 206(2) of the Advisers Act and Rule 204-2(a)(12) thereunder. The Commission deems it appropriate to impose the remedial sanction and issue the cease-and-desist order specified in the Offer submitted by Saavedra.
Accordingly, IT IS HEREBY ORDERED that:
A. Pursuant to Section 203(k) of the Advisers Act, Saavedra shall cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1), and 206(2) of the Advisers Act and Rule 204-2(a)(12) thereunder; and
B. Saavedra shall mail a copy of this Order, together with a cover letter in a form acceptable to the staff of the Commission's Northeast Regional Office, to each of Centurion's existing clients by certified mail, return receipt requested, within thirty (30) days from the date of this Order. From the effective date of this Order until the expiration of twelve (12) months, Saavedra shall provide a copy of this Order to all prospective investment advisory clients not less than forty-eight (48) hours prior to entering into any written or oral investment advisory contract (or not later than the time of entering into such contract, if the client has the right to terminate the contract without penalty within five business days after entering into the contract). Also, within thirty (30) days from the date of this Order, Saavedra shall execute and deliver to the staff of the Commission's Northeast Regional Office an affidavit that he has provided this Order to Centurion's existing clients in accordance with the terms of this Order. Within thirteen (13)
months from the date of this Order, Saavedra shall execute and deliver to the staff of the Commission's Northeast Regional Office an affidavit that he has provided this Order to Centurion's prospective clients in accordance with the terms of this Order.
By the Commission.
Jonathan G. Katz
|1||The findings in this Order are not binding on anyone other than Saavedra.|
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