UNITED STATES OF AMERICA
In the Matter of
Market Timing Systems, Inc.,
|ORDER MAKING FINDINGS,|
IMPOSING REMEDIAL SANCTIONS
AND CEASE-AND-DESIST ORDERS
AS TO MARK F. SHINNICK AND
MARKET TIMING SYSTEMS, INC.
On December 14, 2001, the Securities and Exchange Commission issued an Order Instituting Public Administrative Proceedings Pursuant to Sections 203(e) and (k) of the Investment Advisers Act of 1940 ("Advisers Act") against Market Timing Systems, Inc. ("MTSI"), and pursuant to Sections 203(f) and (k) of the Advisers Act against Mark F. Shinnick ("Shinnick") and Gregory L. Meadors ("Meadors").
MTSI and Shinnick have each submitted an Offer 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 in which the Commission is a party, and without admitting or denying the findings herein, except the jurisdiction of the Commission over them and over the matters set forth in paragraph IIA, which they admit, MTSI and Shinnick have consented to the entry of this Order making findings, imposing sanctions and ordering them to cease and desist as set forth herein.
On the basis of this Order and the Offers submitted by MTSI and Shinnick, the Commission finds1 that:
A. MTSI was registered with the Commission as an investment adviser pursuant to Section 203(c) of the Advisers Act from September 1998 until August 2000. MTSI, a Colorado corporation formed in August 1998, is presently registered as an investment adviser in the State of California. From November 1998 through at least October 1999, Shinnick owned 50% of MTSI and was its president.
B. At all relevant times, MTSI's primary investment advisory service was a daily market timing program tied to the performance of the S&P 500 Index. Under this program, MTSI predicted the movement of the Index and, based on these predictions, switched clients' funds between certain mutual funds whose returns were pegged to the performance of the Index.
C. To predict the movement of the Index, MTSI evaluated a variety of fundamental and technical factors such as the interest rate environment and activity in the stock market. In addition to these factors, MTSI considered signals generated by a computerized model that it called "MASTERTIMER." MASTERTIMER consisted of two commercially available market-timing software programs, including a filter.
D. From September 1998 through October 1999, MTSI disseminated advertisements that featured the historic performance of the MASTERTIMER model. This advertising appeared on MTSI's Web site, in the Investor's Business Daily, and in direct mailings to actual and potential clients. MTSI's advertised performance for its MASTERTIMER model invariably reflected average annual returns of over 70% for at least a 13 year time period. Because MTSI did not begin business until September 1998, these results were hypothetical and generated by the retroactive application of its MASTERTIMER model.
E. MTSI's advertising was false or misleading in that it:
1. Overstated the role the MASTERTIMER model played in MTSI's market timing program and failed to disclose the prominent role played by other fundamental and technical factors. In other words, the advertising was based solely on the performance of the MASTERTIMER model, which was represented to have produced an average annual return in excess of 70% over a 13-year period, and suggested that the model was the primary, if not exclusive, factor in MTSI's program. In fact, MTSI relied on numerous undisclosed factors in making its market timing decisions, including stock market chart patterns, the current policies of the Federal Reserve, interest rates, the prospect of international conflict or war, and astrology.
2. In some cases failed to disclose altogether that the MASTERTIMER results were hypothetical and generated by the retroactive application of a model, and in other cases failed to disclose the relevant limitations inherent in hypothetical results and the reasons why actual results would differ.
3. Failed to disclose that MTSI's actual performance with client accounts during its first quarter of operations was materially less than MASTERTIMER's advertised hypothetical results for the same period.
F. Based on this false and misleading performance advertising, MTSI willfully violated Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder, and Shinnick willfully aided and abetted and caused these violations.
G. In 1990 the California Securities Regulation Division issued an order against a principal of MTSI requiring him to desist and refrain from the further offer or sale of unregistered securities in that state. MTSI failed to disclose this action in MTSI's original Form ADV, filed on August 28, 1998, and two amended Forms ADV filed with the Commission on November 16, 1998 and August 30, 1999, respectively, in willful violation of Section 207 of the Advisers Act.
H. MTSI failed to make and keep all documentation substantiating its performance advertising referenced in paragraphs D and E above. Accordingly, MTSI willfully violated Section 204 of the Advisers Act and Rule 204-2(a)(16) thereunder, and Shinnick willfully aided and abetted and caused these violations.
I. From September 1998 through October 1999, MTSI did not maintain a cash receipts or disbursements journal, or a general ledger reflecting asset, liability, reserve, capital, income and expense accounts. Furthermore, as of October 1999 MTSI had not prepared financial statements. Accordingly, MTSI willfully violated Section 204 of the Advisers Act and Rules 204-2(a)(1), (2) and (6) thereunder, and Shinnick willfully aided and abetted and caused these violations.
J. MTSI has submitted a sworn Statement of Financial Condition dated June 18, 2002 and other evidence and has asserted its inability to pay a civil penalty.
In view of the foregoing, the Commission finds that it is appropriate and in the public interest to impose the sanctions against Respondents as specified in their respective Offers.
Accordingly, IT IS ORDERED:
A. That MTSI mail a copy of this Order to each of its existing clients by certified mail, return receipt required, within 30 days from the date of this Order. For 12 months from the effective date of this Order, MTSI shall provide a copy of this Order to all prospective investment advisory clients not less than 48 hours prior to entering into any written or oral investment advisory contract. MTSI shall also prominently post a copy of this Order on its web site and provide access to the Order from its home page. MTSI shall execute and deliver to Jeffrey Lyons at the Securities and Exchange Commission, Central Regional Office, 1801 California Street, Suite 4800, Denver, Colorado 80202, an affidavit stating that it has provided this Order to its existing clients and posted this Order on its web site in compliance with this Order;
B. Pursuant to Section 203(e) of the Advisers Act, that MTSI be censured;
C. That, based upon MTSI's sworn representations in its Statement of Financial Condition dated June 18, 2002 and other documents submitted to the Commission, the Commission is not imposing a penalty against MTSI. The Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether MTSI provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of the maximum civil penalty allowable under the law. No other issue shall be considered in connection with this petition other than whether the financial information provided by MTSI was fraudulent, misleading, inaccurate, or incomplete in any material respect. MTSI may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of a penalty should not be ordered; (3) contest the imposition of the maximum penalty allowable under the law; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense;
D. Pursuant to Section 203(k) of the Advisers Act, that MTSI cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1), (2) and (4), and 207 of the Advisers Act and Rules 204-2(a)(1), (2), (6) and (16) and 206(4)-1(a)(5) thereunder.
E. Pursuant to Section 203(f) of the Advisers Act, that Mark F. Shinnick be censured;
F. Pursuant to Section 203(i) of the Advisers Act, that Mark F. Shinnick, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $10,000 to the United States Treasury. 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 Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Shinnick as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Jeffrey Lyons at the Securities and Exchange Commission, Central Regional Office, 1801 California Street, Suite 4800, Denver, Colorado 80202;
G. Pursuant to Section 203(k) of the Advisers Act, that Mark F. Shinnick cease and desist from committing or causing any violation and any future violation of Sections 204 and 206(1), (2) and (4) of the Advisers Act and Rules 204-2(a)(1), (2), (6) and (16) and 206(4)-1(a)(5) thereunder.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to MTSI's and Shinnick's Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.
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