UNITED STATES OF AMERICA
|In the Matter of
ORDER INSTITUTING PROCEEDINGS
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against the F.W. Thompson Company Ltd. ("FWT"), a registered investment adviser, and Frederick Thompson, a person associated with FWT.
In anticipation of the institution of these proceedings, FWT and Frederick Thompson have submitted Offers of Settlement 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 herein, except that Respondents admit the jurisdiction of the Commission over them and over the subject matter of these proceedings, FWT and Frederick Thompson consent to the issuance of this Order Instituting Proceedings Pursuant to Sections 203(e), 203(f) and
203 (k) of the Investment Advisers Act of 1940, Making Findings, Imposing Sanctions and a Cease-and-Desist Order ("Order").
On the basis of this Order and the Offers of Settlement submitted by FWT and Frederick Thompson, the Commission makes the following findings:
a. F. W. Thompson Company, Ltd. ("FWT") is an investment adviser located in Ontario, Canada. FWT incorporated its advisory business in 1963 under the laws of Ontario and registered with the Commission on March 17, 1986. FWT has both Canadian and U.S. clients. Frederick W. Thompson, its president, makes all investment decisions for the firm.
b. Frederick W. Thompson, 75, is the President of FWT and is solely responsible for all investment management decisions at FWT. He has been in the investment advisory business since 1963.
For the period January 1996 through August 1997, FWT, a registered investment adviser located in Ontario, Canada, and its principal, Frederick Thompson, allocated shares from initial public offerings ("IPOs"), many of which were "hot IPOs,"1 to client accounts through an ad hoc process that disproportionately favored certain clients to the detriment of other clients, both in absolute numbers of shares received and relative to their assets under management. FWT received shares in 38 IPOs (totaling $9.8 million in value2) on which its clients earned $2.0 million in profits. FWT had no written procedures governing IPO allocations, and provided no disclosure to its clients with respect to its allocation practice.
3. Allocation Analysis
FWT received shares in 38 IPOs between January 1996 and August 1997 in which all of its clients were eligible to participate. Only 15 (or 52%) of the 29 FWT client accounts3 eligible to invest in IPOs received IPOs. (FWT had no direct or indirect interest in any of these accounts.) Fourteen of FWT's clients, therefore, received no IPO allocations during the relevant period. Both Canadian and U.S. clients were affected by this allocation favoritism.
More significantly, the IPOs were allocated in a preferential manner when measured by dollar value. Four clients received 62% of the overall dollar value of the IPOs and also earned 63% of the profits, although these clients accounted for only 8.2% of the total client assets eligible to invest in IPOs and 14% of the assets of the 15 IPO recipients. All but one of these clients paid performance-based fees to FWT. The three performance-based fee clients received 41% of the overall IPO value and 43% of the profits, although they accounted for only 7.3% of total clients assets eligible to invest in IPOs and 12.5% of the total assets of IPO participants.
B. LEGAL ANALYSIS
Congress enacted the Advisers Act to prevent conflicts of interest from affecting the judgment of investment advisers. See Decker v. SEC, 631 F.2d 1380, 1384 (10th Cir. 1980). Section 206 of the Advisers Act imposes a fiduciary duty on investment advisers to exercise the utmost good faith in dealings with clients. SEC v. Wall Street Publishing Institute, Inc. 591 F. Supp. 1070, 1082 (D.D.C. 1984) ("[S]ection 206 established federal fiduciary standards to govern the conduct of investment advisers.") Thus, an investment adviser has an affirmative duty to act in good faith for the benefit of its clients and to disclose fully and fairly all material facts. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
Section 206(2) of the Advisers Act 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." A violation of Section 206(2) does not require a showing of scienter but may rest on a finding of negligence. SEC v. Steadman, 967 F.2d 636, 643, n.5 (D.C. Cir. 1992) (citing Capital Gains Research Bureau, 375 U.S. at 191-92). An adviser's failure to adequately disclose an IPO allocation that favors a certain group of clients may be a material omission that violates Section 206(2). See Dreyfus Corporation, Advisers Act Rel. No. 1870 (May 10, 2000); McKenzie Walker Investment Management, Inc., Investment Advisers Rel. No. 1571 (July 16, 1996); Account Management Corporation, Investment Advisers Rel. No. 1529 (September 29, 1995).
FWT willfully4 violated Section 206(2) of the Advisers Act by engaging in transactions, practices, or courses of business which operated as a fraud or deceit upon its clients. FWT breached its fiduciary duty to its clients by preferentially allocating shares of "hot IPOs" to certain clients without disclosing this practice to its clients. FWT's practice of inequitably allocating IPO shares was a material fact which should have been disclosed to its clients. A reasonable investor, who was contemplating entering into or continuing an advisory arrangement with FWT, would consider it important to be informed of its allocation practices. See Dreyfus Corporation, supra; McKenzie Walker Investment Management, Inc., supra; In the Matter of Thomas H. Richards, Advisers Act Rel. No. 1495 (June 6, 1995).
Frederick Thompson willfully caused and aided and abetted FWT's violations of Section 206(2). As president of FWT and the sole person responsible for investment management of its clients, Thompson was responsible for FWT's disclosure of material information to its clients. Thompson failed to inform FWT's clients of its IPO allocation methods. In addition, he implemented and sanctioned the IPO allocation practices of FWT, which resulted in favoritism toward certain clients.
Based on the foregoing, the Commission finds that:
1. FWT willfully violated Section 206(2) of the Advisers Act;
2. Frederick W. Thompson willfully caused and aided and abetted FWT's violations of Section 206(2) of the Advisers Act.
On the basis of the foregoing, it is appropriate and in the public interest to impose the sanctions which are set forth in the Offers submitted by FWT and Frederick Thompson.
Accordingly, IT IS ORDERED, that:
A. FWT is censured;
B. Frederick Thompson is censured;
C. FWT shall cease and desist from committing or causing any violation of, and any future violation of, Section 206(2) of the Advisers Act;
D. Frederick Thompson shall cease and desist from committing or causing any violation of, and any future violation of, Section 206(2) of the Advisers Act; and
E. FWT shall pay, within thirty (30) days of the issuance of this Order, a civil penalty of $100,000 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 U.S. Securities and Exchange Commission; (C) sent by certified mail to the Office of the Comptroller, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549-0205; and (D) submitted under cover letter which identifies FWT and Frederick Thompson as Respondents in these proceedings, the file number of these proceedings and the Commission's case number, a copy of which cover letter and money order or check shall be sent to Michael P. Moore, Branch Chief, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549-0803.
By the Commission.
Jonathan G. Katz
|1||IPOs characterized as "hot" prior to the offering are those for which demand is particularly strong and trading is expected to occur at a significant premium over the offering price in the immediate aftermarket. See Dreyfus Corporation, Investment Advisers Act Release No. 1870 (May 10, 2000).|
|2||The dollar value of an IPO allocation equals the number of shares allocated times the offer price.|
|3||FWT also had 12 accounts affiliated with Thompson. FWT excluded these accounts from IPO allocations, and they are not included in the 29 accounts.|
|4||In applying the term "willful" in Commission administrative proceedings instituted pursuant to Sections 15(b), 15B, 15C, 17A and 19(h) of the Exchange Act, Section 9(b) of the Investment Company Act, and Sections 203(e) and (f) of the Advisers Act, the Commission evaluates on a case-by-case basis whether the respondent knew or reasonably should have known under the particular facts and circumstances that his conduct was improper. In this case, as in all Commission administrative proceedings charging a willful violation under these statutory provisions, the Commission applies this standard to persons -- specifically, securities industry professionals -- who are directly subject to Commission jurisdiction and who have a responsibility to understand their duties to the investing public and to comply with the applicable rules and regulations which govern their behavior.|
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