UNITED STATES OF AMERICA
In the Matter of
TIMOTHY B. GAMWELL,
|ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940|
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Timothy B. Gamwell ("Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") 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, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, And Imposing A Cease-And-Desist Order Pursuant To Section 203(k) Of The Investment Advisers Act Of 1940 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that
1. Respondent, Timothy B. Gamwell, is 51 years old and a resident of Key Biscayne, Florida. Respondent is the principal officer and control person of various entities based in Miami, Florida that received loans from Capital Consultants, LLC from early 1998 to August 2000. These entities, which are in the business of acquiring and servicing loans for automobile and consumer purchases, include Creditmart, Inc., Brooks Financial, LLC ("Brooks"), and Beacon Financial Group, LLC ("Beacon").
Other Relevant Entities
2. Capital Consultants, LLC ("CCL") was a registered investment adviser located in Portland, Oregon. On September 21, 2000, the Commission filed an emergency action against CCL alleging violations of the antifraud provisions of the Securities Act of 1933, Securities Exchange Act of 1934, and Advisers Act in connection with a fraudulent scheme perpetrated by CCL on its advisory clients. In that action, CCL was preliminarily and permanently enjoined from future violations of the antifraud provisions and placed under receivership. SEC v. Capital Consultants, LLC, Jeffrey L. Grayson, and Barclay L. Grayson, Lit. Rel. Nos. 16720 & 16995 (Sept. 21, 2000 & May 10, 2001). On August 10, 2001, the Commission revoked CCL's registration as an investment adviser. In re Capital Consultants, LLC, Advisers Act Rel. No. 1963 (Aug. 10, 2001).
3. Brooks Financial, LLC, an Oregon limited liability company based in Miami, Florida, was formed by Respondent in June 1999.
4. Beacon Financial Group, LLC, a Florida limited liability company based in Miami, Florida, was formed by Respondent in January 2000.
5. Between 1994 and October 16, 1998, CCL used advisory client funds to lend Wilshire Credit Corp. ("Wilshire Credit") a total of $160 million. Wilshire Credit's monthly payments on the $160 million loan were to be the source of CCL's monthly returns to its advisory clients as to the Wilshire Credit loan. Wilshire Credit was current on the loan payments through November 1998, when it announced that it was having financial problems, that it had reached an agreement in principle to restructure its debts (including the loan from CCL), and that the restructuring could entail bankruptcy.
6. The default of the Wilshire Credit loan and its parent company's bankruptcy filing created the likelihood of a significant loss to CCL's clients who were invested in the Wilshire Credit loan. Therefore, CCL devised a scheme to hide from its clients the default of the Wilshire Credit loan. In December 1998, CCL sold the Wilshire Credit loan at its full $160 million value to a single purpose entity (the "Company") formed by a CCL borrower. The sole purpose for the creation of the Company was to purchase the Wilshire Credit loan.
7. By March 1999, it became apparent to CCL that the Company would be unable to make the $1.5 million monthly interest payments on the Wilshire Credit loan. In order to continue its scheme to conceal the default from its clients, CCL determined that it would need to locate another source as to payments on the Wilshire Credit loan. In response, CCL offered to make a new loan to companies affiliated with Respondent in return for assistance in restructuring the Wilshire Credit loan. CCL's offer was contingent on Respondent's agreement that the companies affiliated with Respondent would purchase a portion of the Wilshire Credit loan using money from both the new loan from CCL and profits generated from the use of the new loan. Respondent agreed to CCL's terms because of the need for funding for the affiliated entities for their loan acquisition and servicing businesses. Respondent caused the formation of Brooks to receive the new loan from CCL.
8. In June 1999, CCL agreed to lend Brooks up to $50 million of client funds to fund Brooks' purchase of consumer-debt receivables and to purchase a portion of the Wilshire Credit loan from the Company. The Brooks loan agreement required Brooks to use a portion of its profits from its use of the CCL loan to acquire up to a $108 million portion of the Wilshire Credit loan. In a second, related agreement, Brooks also agreed to purchase up to $108 million of the Wilshire Credit loan from the Company.
9. From June 1999 to December 1999, CCL advanced to Brooks $38.1 million under the Brooks loan. CCL used amounts of between $1.028 million to $1.53 million from each disbursement to pay a portion of the monthly Wilshire Credit loan interest payments and thereby to pay returns to CCL's clients. In total, CCL used approximately $7.843 million of the $38.1 million advanced to Brooks in this manner.
10. In January 2000, as Brooks neared the limit of its loan commitment, CCL approached Respondent and offered to fund an additional $50 million loan from CCL, which would also allow for continued payments on the Wilshire Credit loan. In order to effect the funding, CCL directed the formation of another entity, Beacon, to receive the loan proceeds. Unlike the Brooks loan agreement, the Beacon loan agreement did not explicitly state that a purpose of the loan was to purchase a portion of the Wilshire Credit loan from the Company. On the contrary, in a February 2000 amendment to the Beacon loan agreement, Beacon and CCL expressly agreed that Beacon's decision to purchase a portion of the Wilshire Credit loan was not an express or implied condition of CCL's agreement to make advances on the Beacon loan. Respondent, however, was aware that CCL conditioned Beacon loan disbursements on Beacon's use of a portion of the disbursement to fund Beacon's purchase of an additional portion of the Wilshire Credit loan.
11. From January to July 2000, CCL advanced to Beacon $35.888 million under the Beacon loan. CCL used amounts of between $1.014 million to $1.115 million from each disbursement to pay a portion of the $1.514 million to $1.614 million monthly Wilshire Credit loan interest payments and thereby to pay returns to CCL's clients. In total, CCL used approximately $7.372 million of the $35.888 million advanced to Beacon in this manner.
12. At CCL's request, Respondent agreed on behalf of Brooks and Beacon to invest a portion of the Brooks and Beacon loans' cash collateral account in a fund (the "Fund") operated by the principal of the Company. From July 1999 through August 2000, Respondent had Brooks and Beacon invest a total of $9.5 million in the Fund. Unknown to Respondent, the principal of the Company used the profits from the Fund, whose sole investors were Brooks and Beacon, to make interest payments on the Wilshire Credit loan.
Respondent's Role In CCL's Scheme
13. Respondent was aware that CCL was a registered investment advisor and that CCL used advisory client funds to make loans. During the relevant time period, Respondent was unaware of the representations CCL made to its clients regarding the Wilshire Credit, Brooks, and Beacon loans. However, Respondent was negligent in not being aware that CCL was engaging in investment advisory fraud based on his business dealings with CCL.
14. In July and December 1999, Respondent signed documents prepared by CCL representing that it was Brooks' and Beacon's sole and exclusive decision to invest their cash collateral accounts in the Fund, when in fact CCL instructed Respondent to make this investment.
15. In February 2000, Respondent signed an amendment to the Beacon loan agreement in which he expressly agreed that Beacon's decision to purchase a portion of the Wilshire Credit loan was not an express or implied condition of CCL's agreement to make advances on the Beacon loan. Respondent, however, was aware that CCL required Beacon to purchase a portion of the Wilshire Credit loan in order to receive funding and therefore signed the amendment at CCL's instruction.
16. In April 2000, in a meeting organized by CCL with its auditors, Respondent represented that Brooks and Beacon were making interest payments on the Wilshire Credit loan using cash flow from Brooks' and Beacon's use of their respective loans. In fact, a substantial portion of Brooks' and Beacon's interest payments on the Wilshire Credit loan were made directly out of Brooks and Beacon loan proceeds.
17. 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."
18. A violation of Section 206(2) may be established by a showing of simple negligence. SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992); see also In re KPMG Peat Marwick LLP, Exchange Act Rel. No. 43862, Admin. Proc. File No. 3-9500 (Jan. 19, 2001) (a person can be a cause of another's primary violation through negligent conduct).
19. CCL committed primary violations of Section 206(2) of the Advisers Act because it willfully defrauded its clients by using Brooks and Beacon loan proceeds, which were client funds, to make interest payments for the benefit of other clients who were invested in the Wilshire Credit loan.
20. Respondent was a cause of certain of CCL's violations of Section 206(2) of the Advisers Act because he was negligent in not being aware that Brooks' and Beacon's interest payments on the Wilshire Credit loan using loan proceeds from CCL resulted in violations of Section 206(2) being perpetrated by CCL on its clients.
In view of the foregoing, the Commission deems it appropriate to impose the cease-and-desist order specified in Respondent's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED:
Pursuant to Section 203(k) of the Advisers Act, that Respondent cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Advisers Act.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|Home | Previous Page||