Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
March 19, 2003
|APPEARANCES:||Martin F. Healey and Alix Biel for the Division of
Enforcement, Securities and Exchange Commission
William Shaw McDermott, Jacqueline Edwards, and Brian Sheppard for Respondent
|BEFORE:||Robert G. Mahony, Administrative Law Judge|
The Securities and Exchange Commission (Commission) instituted this proceeding by an Order Instituting Proceeding (OIP) on September 28, 2001, pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act) to determine whether Respondent Chris Woessner (Respondent or Woessner) willfully aided and abetted and caused violations of Sections 206(1) and 206(2) of the Advisers Act.
The OIP alleges that from about mid-1994 to mid-1997 (relevant period), Duff & Phelps Investment Management Company, Inc. (Duff & Phelps), a registered investment adviser, failed to disclose to its clients that it used more than $715,000 of its clients' equity commissions to compensate East West Institutional Services, Inc. (East West), a registered broker-dealer, and Performance Analytics, Inc. (Performance Analytics), a registered investment adviser, for referral of the International Brotherhood of Teamsters Union Local 710 (Local 710) pension fund account.1 (OIP at 1-2.) The OIP further alleges that Woessner willfully aided and abetted and caused Duff & Phelps to enter into the scheme in violation of Sections 206(1) and 206(2) of the Advisers Act. (OIP at 1-2.)
Woessner filed his Answer on October 26, 2001, and denied aiding and abetting or causing the alleged fraudulent conduct. The Answer also asserts affirmative defenses, including statute of limitations, 28 U.S.C. § 2462, and laches. Woessner filed a Motion for Summary Disposition on April 18, 2002, arguing, inter alia, that the proceeding was barred by the statute of limitations. The motion was renewed at the close of the Division of Enforcement's (Division) case. A hearing was held on April 9-12 and 15-19, 2002, in Boston, Massachusetts. The Division and Woessner filed proposed findings of fact, conclusions of law, and supporting briefs.
FINDINGS OF FACT
My findings and conclusions are based on the entire record and on the demeanor of the witnesses.2 I have applied "preponderance of the evidence" as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91, 97-104 (1981). I have considered and rejected all arguments, proposed findings, and proposed conclusions that are inconsistent with this decision.
Woessner is a resident of Tiburon, California. He has a bachelor's degree from Colby College and served two and one-half years in the Air Force during 1970-72. After leaving the Air Force, he worked in banking and with investment firms dealing with union pension funds. He joined Duff & Phelps in 1990 as Senior Vice President of Marketing. His office was in San Francisco. From 1990 to 1992, he worked with Calvin Pedersen (Pedersen), then Senior Vice President of Marketing, who was taking on more management duties. Pedersen had been generating union pension fund business for Duff & Phelps.3 Woessner left Duff & Phelps at the end of February or early March 1997 and joined Loomis Sayles & Company, which he describes as a major investment manager. Currently, he is a principal with Olympic Investment Group, a marketing consulting company. (Tr. 1304, 1307, 1395-99, 1402.)
Duff & Phelps Agrees To Direct Brokerage To East West
Woessner learned of East West from Robert Carr (Carr), a business associate of Pederson, during a luncheon meeting in Chicago in the summer of 1994. Carr told Woessner that East West had a reputation for being able to introduce people to accounts in Chicago. He suggested that Woessner meet with Christopher Roach (Roach), who owned East West, to find out about its products, how it cleared trades, and what it could provide Duff & Phelps.4 (Tr. 1403-05.)
In mid-June 1994, Woessner, Carr, and Roach met again for breakfast in Chicago. Roach explained to Woessner that East West was a brokerage firm that cleared its trades through other brokers and that it could provide research to Duff & Phelps in exchange for brokerage.5 (Tr. 400-02.) Later that week, Woessner met with Pedersen and told him that Roach could make an introduction "to the board of trustees of various teamster funds in Chicago." Woessner and Pedersen then met with Wayne Stevens (Stevens), the President and Chief Investment Officer of Duff & Phelps. (Tr. 818-19, 1408-10.)
Pedersen and Woessner told Stevens that East West had contacts with pension fund clients, and it might help Duff & Phelps obtain this business. Stevens was also advised that Rauscher Pierce was a clearing broker for East West and it would provide Duff & Phelps with research. Woessner and Pedersen told Stevens about the types of research that it was possible to get "knowing that this was really the key determinant." Woessner testified that Stevens got "quite excited" when he learned that Rauscher Pierce was going to produce the research because Stevens liked regional research. In 1994, Rauscher Pierce had a reputation for providing good analysis of medium and small cap companies in the energy field. (Tr. 826-30, 1411.)
Stevens told Pedersen and Woessner that he would take the East West matter to the Brokerage Allocation Committee (Committee) within Duff & Phelps. This Committee operated somewhat informally. Stevens was Chairman and, for the most part, recommended brokers. It met about twice yearly and received input from various parts of the firm.6 (Tr. 114-15, 828, 832, 851, 901-02.) When a name was submitted for consideration, the broker had to meet four criteria: (1) it had to provide best price and best execution; (2) the commission rate had to be commensurate with institutional trades; (3) the broker had to provide valuable added research to the investment process; and (4) it had to be approved by compliance officials. Stevens does not recall what he told the Committee about East West, but it probably was that it had to meet these four criteria. Due diligence would have been performed by compliance personnel, but Stevens does not recall getting any report from compliance.7 At some point in the fall of 1994, Woessner learned that East West and Rauscher Pierce had been approved for the purpose of executing client trades for Duff & Phelps. Pedersen assumed that any broker executing trades for Duff & Phelps's clients had been approved by the Committee, but he never saw a brokerage list. (Tr. 829, 868-70, 1315-17, 1412-13.)
Duff & Phelps Directs Brokerage To Rauscher Pierce And East West
In late 1994, Timothy Fitzgerald (Fitzgerald), Duff & Phelps's head equity trader, first learned of East West in a conversation with Stevens, Woessner, and Cathy Donahoe (Donahoe), the head trader. Stevens introduced Woessner to Fitzgerald and gave him an East West business card. Stevens and Woessner told Fitzgerald that East West could be helpful in obtaining new business and that Fitzgerald should arrange for trading with it. This was the only time Fitzgerald met or spoke to Woessner. (Tr. 287-92, 348.) When Fitzgerald first learned of East West, he was given the option of trading through Rauscher Pierce or Chicago Corporation. Fitzgerald and Donahoe decided to use Rauscher Pierce because Duff & Phelps had previously cleared trades through Rauscher Pierce that benefited another client. (Tr. 302-06.)
Several weeks later, Stevens and Jeff Simmons (Simmons), a Duff & Phelps vice president, met with Fitzgerald and asked if business had commenced with East West. Thereafter, they inquired monthly about the amount of commissions transacted with East West. Stevens, Simmons, and Woessner sent Fitzgerald messages indicating that they wanted to generate more commissions with East West by a certain date. On a few occasions, Woessner asked Simmons to deliver a message to Fitzgerald about directing trades to East West. Simmons wrote a note to Fitzgerald on December 12 (without noting a year) suggesting that trading be increased through East West. Woessner also left a phone message for Fitzgerald on December 19 (without noting a year) suggesting that trading be increased through East West. (Tr. 293-02, 1279-85; Div. Exs. 2, 24-25.)
Stevens first heard of East West when Pedersen and Woessner requested that it receive brokerage. He knew that some of the commissions that went to Rauscher Pierce would go to East West, but he did not know the amounts each received.8 He understood that the commissions, which were in soft dollars, were to benefit Duff & Phelps's clients, and this was an important part of the firm's fiduciary relationship.9 Stevens states that "[Duff & Phelps] made a conscious decision that [the commissions going to Rauscher Pierce and East West] fulfilled our obligations to have best execution, the best price, the appropriate commissions, for institutional trading, providing value out of research, and met the criteria for our compliance people." (Tr. 868, 889-91.)
The Rauscher Pierce research was mailed by East West to Duff & Phelps; it came in about three months late and Fitzgerald did not use it. He told Stevens and Brown that this research was worthless. Fitzgerald forwarded the research to Stevens's office where it was filed. (Tr. 310, 317-19.) Although Duff & Phelps was getting Rauscher Pierce research, Stevens knew Duff & Phelps was not receiving anything from East West. In his opinion, the Rauscher Pierce research was "good . . . value added research." He found it useful in his thinking about the energy section of the Duff & Phelps model portfolio. Mustain was aware that Duff & Phelps did not receive research from East West and did not find the Rauscher Pierce research helpful. Duff & Phelps received thousands of research reports each year. (Tr. 600-01, 828, 831, 873, 891-92.)
Duff & Phelps Obtains The Local 710 Account
Before Roach would recommend Duff & Phelps as an investment adviser to Local 710, it had to do business with East West for some time in order to create a paper trail. This period lasted about nine months until June 1995.10 At some point during this period, Woessner told Roach that Pedersen and Stevens were getting restless for "the account" because Duff & Phelps had done about $30,000 to $40,000 in commissions with East West.11 (Tr. 410-12.)
Prior to making any decision about hiring an investment adviser, Local 710, on advice of counsel, decided to hire an investment consultant. Roach testified that Baker and Close were "getting nervous" about distributing large sums of money. They wanted a consultant they could control as a buffer for picking the investment adviser rather than doing it themselves. Baker and Close would vote to support the consultant's selection if the consultant chose the adviser they wanted.12 To achieve this, Carr referred Roach to Leslie Golembo (Golembo), who was a principal with Performance Analytics. Golembo agreed to pick the adviser Baker and Close wanted, and Performance Analytics was chosen to be the Local 710 investment consultant. (Tr. 172-73, 175-76, 407-09.)
The first meeting Duff & Phelps had with the Local 710 Investment Committee was on December 8, 1994. It took place shortly after Pederson and Stevens expressed concern to Woessner about getting the Local 710 account as a result of the trading with East West. Brian O'Malley (O'Malley), the administrator for Local 710, called Woessner to set up the December meeting. (Tr. 1414; Div. Ex. 78.)
At this meeting, Local 710 was represented by Trustees Frank Wsol, William Joyce, George Dobson, Hugh Corcoran (Corcoran), Baker, and Close. Besides the Trustees, Golembo and others associated with Local 710 were present at the December 8 meeting. Woessner, Stevens, and Simmons made the presentation for Duff & Phelps. (Tr. 1414-15; Div. Ex. 78.) According to Woessner, the presentation "went fine." (Tr. 1416.) They made subsequent presentations at the joint Local 710 Board and Investment Committee meetings on May 16 and June 9, 1995. Corcoran and Close were the Trustees present at the May 16 meeting; all six Trustees were present at the June 9 meeting. Golembo, and others on behalf of Local 710, were also present at the May and June meetings. (Div. Exs. 95, 99.)
The Local 710 minutes of these meetings reflect that Duff & Phelps was a non-bank related Chicago firm and that it had a large base of pension fund accounts. (Div. Exs. 54-55, 95, 99.) Woessner stated that another "selling point" was that Duff & Phelps always sold its private in-house research. Simmons and Stevens talked about the investment philosophy and the performance of various products. When the presentation was finished, Woessner did not have an understanding that there was a likelihood of securing the engagement. (Tr. 1419-20.) The Local 710 minutes do not reflect any discussion about Roach or his demand to direct brokerage to East West. (Div. Exs. 54-55, 95, 99.)
Corcoran never knew of a kickback arrangement involving Roach, Close, and Baker. He did not know that Performance Analytics agreed to select the investment adviser that Close and Baker wanted as a condition for getting a consulting agreement with Local 710. Further, he did not know that Duff & Phelps was directing brokerage to East West to have Roach influence the selection of Duff & Phelps as an investment adviser. Corcoran would have wanted to know about these matters in the course of making a decision about hiring or retaining an investment adviser for Local 710. (Tr. 1160-66.)
On or about May 31, 1995, Woessner discussed with O'Malley a fee structure and a negotiated fee. Duff & Phelps was awarded the Local 710 account on June 13, 1995. Although Roach never attended the Local 710 Investment Committee or Board meetings, he called Woessner to inform him about the award.13 (Tr. 414; Div Exs. 17, 99.) The Asset Management Agreement, signed by Woessner on behalf of Duff & Phelps, contained a fiduciary duties section that required the asset manager to exercise its duties and powers in the best interests of the client.14 (Tr. 1420-21; Div. Ex. 17.) For obtaining the Local 710 account, Woessner received approximately $60,000 based on commissions of ten, eight, and six percent, respectively, for the first three years. (Tr. 1550-51.)
After obtaining the Local 710 account, Duff & Phelps continued to direct an adequate amount of brokerage to East West for two or three months, but then it lessened. During the last quarter of 1995, Roach called Woessner frequently to insist that East West get more brokerage from Duff & Phelps or lose the Local 710 account. For 1996, Roach wanted $600,000 in commissions, which equaled the management fees on the Local 710 account. Woessner gave the information about the request for increased brokerage to Simmons. He also made frequent reports to Pederson. (Tr. 415-22, 1422-28.)
Duff & Phelps Terminates Its Relationship With East West
On or about February 14, 1996, Robert Moore (Moore), the head of fixed income at Duff & Phelps, asked Brown to attend a meeting the following day. Moore thought he was going to be pressured to steer fixed income trading in a certain direction. Moore, Brown, Stevens, Pedersen, Timothy Hyland (Hyland) (by video conference), and Woessner attended the meeting. (Tr. 722-24, 779-80.) Hyland, who was in sales and marketing and reported to Woessner, talked about the "friends of the firm" concept. (Tr. 780.) He wanted to give brokers that had a long-standing relationship with Duff & Phelps an opportunity to bid on fixed income brokerage. (Tr. 781-82.) Moore and Brown said they could not do that because it would sacrifice best execution. Brown believed that Hyland's suggestion was to rig the bidding process. (Tr. 726-27.)
Woessner stated that Duff & Phelps should direct $600,000 in brokerage to East West or it would lose "the account." Brown objected because Duff & Phelps could not direct brokerage in return for referrals of business. He believed that Woessner was proposing a quid pro quo and that paying the $600,000 would be illegal and a Form ADV disclosure violation. Pedersen agreed with Moore and Brown that Duff & Phelps would not sacrifice best execution or do referrals and they would do everything "by the book." Thereafter, at or near the end of the first quarter in 1996, the relationship with East West terminated. (Tr. 727-32, 783-84.)
A year earlier, Brown sent a letter to Hyland dated January 30, 1995, in response to an e-mail Hyland sent to Mustain on January 12, 1995, requesting that equity commissions be directed to certain named brokers who had been helpful in initiating and retaining business with Duff & Phelps. (Tr. 691-93; Div. Ex. 5.) Brown pointed out that Duff & Phelps did not send brokerage to firms in exchange for client referrals. He stated that this was a strict firm policy and was set out in the firm's Form ADV filed with the Commission. Brown quoted the Form ADV language in the letter and stated that any violation of the policy could raise questions about Duff & Phelps performing its fiduciary duties satisfactorily and the accuracy of its Form ADV disclosures. (Div. Ex. 5.) Because this was an important issue, he sent copies of the letter to Stevens, Woessner, Meder, and the outside counsel. Brown insured that a copy was sent to Woessner because he was the head of marketing and Hyland reported to him. (Tr. 691-95; Div. Ex. 5.)
After the February 14 meeting, Woessner along with Pedersen and Stevens, continued to discuss Roach's request for more brokerage. Woessner suggested Duff & Phelps increase its business with East West. They concluded, however, that what Duff & Phelps was getting in terms of research was not worth the aggravation and decided to cease directing brokerage to East West and Rauscher Pierce, even if it meant losing the Local 710 account. (Tr. 1428-32.)
Duff & Phelps Contracts With Performance Analytics
In early 1996, Woessner, after a conversation with Golembo, asked Donald Gingery (Gingery), a vice president in Woessner's marketing group, to evaluate a Performance Analytics product that it sold to investment advisers. (Tr. 936-38.) Gingery met with a staff member of Duff & Phelps who demonstrated the product, a quarterly report that analyzed the various investment products Duff & Phelps offered. (Tr. 945-46, 961, 1444-45.) Gingery informed Woessner that it was a standard industry package similar to other products Duff & Phelps received. (Tr. 939-40, 947.) Woessner then suggested to Pederson that Duff & Phelps get the reports "to identify what [Performance Analytics] thought our product was; especially on the equity side." (Tr. 1446.)
In May 1996, Duff & Phelps contracted with Performance Analytics for its reports at an annual fee of $100,000. (Div. Ex. 8-12, 121.) This fee was about twice as high as Duff & Phelps paid to other consultants. (Tr. 939.) Payment was again in soft dollars, directed to Lakeview Securities, Performance Analytics's clearing broker. (Tr. 953-54.) However, unlike other soft dollar services where Fitzgerald would see the product, he only saw invoices from Performance Analytics. (Tr. 326-28.) Fitzgerald told Gingery that it seemed like a duplicate service. (Tr. 329.)
Mustain described the Performance Analytics reports as account performance charts that evaluated Duff & Phelps against peer firms.15 (Tr. 612-15.) These reports were part of the array of consultant reports Duff & Phelps received; most had about the same information. (Tr. 611-13.)
The reports from Performance Analytics came to Pedersen; he found them "useful," but did not spend a lot of time going over them. He believed the reports were also useful to the clients. In his view, an annual soft dollar payment of $100,000 was an appropriate amount to pay for the reports. Fitzgerald was concerned that he would not have enough commissions to pay Performance Analytics because the cost was so high. Thereafter, Fitzgerald discussed the cost with Pedersen who, after further inquiry, stated that they would cancel the Performance Analytics agreement because there was insufficient commission money to support it in light of other services and research Duff & Phelps needed. (Tr. 327, 330, 1323-24, 1390.) On July 30, 1997, Pedersen wrote to Golembo and "temporarily" cancelled Performance Analytics's services due to lack of commissions.16 (Div. Ex. 14.) When Duff & Phelps ended its relationship with Performance Analytics, it did not hire another consultant to take the place of Performance Analytics. (Tr. 953.) Duff & Phelps's services were terminated by Local 710 on August 22, 1997. (Div. Ex. 29.)
Duff & Phelps Form ADV Filings
Duff & Phelps filed its annual Form ADV and amendments as required. (Tr. 131-32.) The filings on March 30 and December 15, 1995, were signed by Stevens; those made on January 16, March 25, December 6, 1996, and March 27, 1997, were signed by Brown. (Div. Exs. 64-68, 94, 152.)
The 1995 and 1996 filings contained, inter alia, the following statement:
Under no circumstances does Applicant share in commissions paid by its clients to brokerage firms nor does it receive any referrals of potential investment counsel clients from brokerage firms in return for allocating brokerage business to them.
(Div. Exs. 64-68, 94.) Duff & Phelps ceased directing brokerage to East West after October 1996, and the March 1997 Form ADV does not contain this language.17 (Div. Ex. 152.)
CONCLUSIONS OF LAW
Advisers Act Antifraud Provisions
Sections 206(1) and 206(2) of the Advisers Act make it unlawful for any investment adviser, using jurisdictional means, to directly or indirectly:
1) employ any device, scheme, or artifice to defraud any client or prospective client, or
2) engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.
Scienter is required to establish a violation of Section 206(1). See SEC v. Steadman, 967 F.2d 636, 641 & n.3 (D.C. Cir. 1992); see also Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). Scienter is defined as "a mental state embracing intent to deceive, manipulate, or defraud." Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976); Steadman, 967 F.2d at 641. Reckless conduct can satisfy the scienter requirement. See Steadman, 967 F.2d at 641-42; see also Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990); David Disner, 52 S.E.C. 1217, 1222 & n.20 (1997). Reckless conduct is conduct which is "`highly unreasonable' and which represents `an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978); (quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977)). "Proof of scienter . . . need not be direct, but may be a `matter of inference from circumstantial evidence.'" Valicenti Advisory Servs. Inc. v. SEC, 198 F.3d 62, 65 (2d Cir. 1999) (quoting Wechsler v. Steinberg, 733 F.2d 1054, 1058 (2d Cir. 1984)).
Scienter is not required to establish a violation of Section 206(2); a showing of negligence is adequate. See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963); see also Steadman, 967 F.2d at 643 n.5; Steadman v. SEC, 603 F.2d at 1132-34. Material misrepresentations and omissions violate Sections 206(1) and 206(2) of the Advisers Act. The standard of materiality is whether or not a reasonable investor or prospective investor would have considered the information important in deciding whether or not to invest. See Basic, Inc. v. Levinson, 485 U.S. 224, 231-32, 240 (1988); see also TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Steadman, 967 F.2d at 643.
Section 206 of the Advisers Act establishes "federal fiduciary standards" to govern the conduct of investment advisers. See Transamerica Mortgage Advisers, Inc. v. Lewis, 444 U.S. 11, 17 (1979). A fiduciary owes its clients "an affirmative duty of utmost good faith, and full and fair disclosure of all material facts." Capital Gains, 375 U.S. at 194 (internal quotations marks omitted).
Duff & Phelps is accountable for the actions of its responsible officers, including Woessner and others. Their conduct and scienter are also attributed to the firm. See C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1435 (10th Cir. 1988); see also A.J. White & Co. v. SEC, 556 F.2d 619, 624 (1st Cir. 1977); SEC v. Blinder, Robinson & Co., 542 F. Supp. 468, 476 n.3 (D. Colo. 1982) (citing SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1096-97 nn.16-18 (2d Cir. 1972)).
Aiding and Abetting; Causing
For aiding and abetting liability under the federal securities laws, three elements must be established: (1) an independent securities law violation committed by another party; (2) knowledge by the aider and abettor that his or her role was part of an overall activity that was improper; and (3) that the aider and abettor knowingly and substantially assisted the conduct that constitutes the violation. See Woods v. Barnett Bank, 765 F.2d 1004, 1009 (11th Cir. 1985); see also Investors Research Corp. v. SEC, 628 F.2d 168, 178 n.61 (D.C. Cir. 1980); IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); Woodward v. Metro Bank, 522 F.2d 84, 94-97 (5th Cir. 1975); Russo Sec. Inc., 53 S.E.C. 271, 278 & n.16 (1997); Sheldon, 51 S.E.C. at 66; William R. Carter, 47 S.E.C. 471, 502-03 (1981).
Notwithstanding the level of proof required to establish a primary violation, the Commission has determined that a respondent charged as an aider and abettor must have acted with scienter. See Kingsley, Jennison, McNulty & Morse Inc., 51 S.E.C. 904, 911 (1993) (holding a registered investment adviser liable for willful violations of Section 206(2) of the Advisers Act, but ruling that good faith by the firm's officer "preclude[s] a finding of scienter necessary to hold that . . . [the officer] aided and abetted [the firm's] various violations"); Donald T. Sheldon, 51 S.E.C. 59, 66-67 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995) (holding the president of a firm liable as an aider and abettor because he "acted with the requisite knowledge," i.e., recklessly, even though the underlying misconduct by the firm involved the net capital rule, a non-scienter violation).
A person cannot escape aiding and abetting liability by claiming he or she was ignorant of the securities laws. See Sharon M. Graham, 53 S.E.C. 1072, 1085 n.33 (1998), aff'd, 222 F.3d 994 (D.C. Cir. 2000). "Knowledge means awareness of the underlying facts, not the labels that the law places on those facts." SEC v. Falstaff Brewing Corp., 629 F.2d 62, 77 (D.C. Cir. 1980). The knowledge or awareness requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or active participant. See Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990); see also IIT, 619 F.2d at 923, 925; Rolf, 570 F.2d at 47-48; Woodward, 522 F.2d at 97.
The Commission has stated that a showing of recklessness will satisfy the "substantial assistance" element of an aiding and abetting charge. See Graham, 53 S.E.C. at 1084-85; see also Russo Sec., 53 S.E.C. at 278. Moreover, a respondent who aids and abets a violation is also a cause of the violation. See Graham, 53 S.E.C. at 1085 n.35.
Primary Violations by Duff & Phelps
Woessner is charged with aiding and abetting and causing a fraudulent scheme by Duff & Phelps that involved the use of soft dollars generated by equity commissions from clients' trades from October 1994 to August 1997, to obtain and retain the Local 710 account. Although the trades received best price and best execution, the evidence conclusively establishes that the only reason for directing brokerage to benefit East West and the payment of $100,000 to Performance Analytics was to obtain and retain Local 710 as a client. There is no contrary credible evidence in the record.
As an investment adviser, Duff & Phelps owed its clients a fiduciary duty to act in its clients' best interests and not in its own self-interest. Duff & Phelps violated this duty by failing to disclose to its clients, including Local 710, that it was directing brokerage to East West in return for a referral of the Local 710 account. Stevens, as President and Chief Investment Officer of Duff & Phelps, was directly involved in arranging the trading with East West and knew, or was reckless in not knowing, that Duff & Phelps was violating its fiduciary duty to its clients.
Woessner and Stevens sought to justify directing brokerage to East West, by citing the need for Rauscher Pierce's research for Duff & Phelps. However, Mustain and Fitzgerald testified that it duplicated research from other sources or was so out of date that it was not helpful. Rauscher Pierce was never in the top or lower tier of brokers who provided valuable products to Duff & Phelps. Significantly, Duff & Phelps no longer received Rauscher Pierce's research when trading with East West stopped. I credit the testimony of Mustain and Fitzgerald that the Rauscher Pierce's research was of little or no value to Duff & Phelps. Obtaining this research cannot credibly explain why Duff & Phelps directed about $500,000 in brokerage to Rauscher Pierce and East West, particularly where East West did not provide research or anything else to Duff & Phelps. Using the brokerage for this purpose did not benefit the clients from whose accounts it came. I do not credit any testimony of Woessner or Stevens concerning the purported value of Rauscher Pierce's research to Duff & Phelps.
The $100,000 contract that Duff & Phelps executed for Performance Analytics's reports furthered the scheme. Pedersen authorized the contract, which extended from about May 1996 until July 1997. It was paid for in soft dollars by directing trades to Performance Analytics's clearing broker, Lakeview Securities. The fee was twice the amount paid to other consultants, and Fitzgerald was concerned about being able to pay for it. The contract was executed at or near the time Pederson knew that the relationship with East West was ending.
Gingery advised Woessner that the reports were a standard industry package similar to other reports Duff & Phelps received. Nevertheless, Woessner encouraged Pederson to get them. As with the trading with East West, using brokerage in this fashion did not benefit the clients from whose accounts it came. Although Golembo was instrumental in obtaining the Local 710 contract for Duff & Phelps, he was now recommending that Local 710 terminate Duff & Phelps as an investment adviser. The contract was, in effect, "a payoff" to Golembo to dissuade him from recommending that Local 710 eliminate Duff & Phelps as an investment adviser.
In addition to violating its fiduciary duties to its clients, Duff & Phelps also filed materially false Form ADVs with the Commission during 1995 and 1996. The Form ADVs filed by Duff & Phelps during those years falsely stated that it did not direct brokerage in return for client referrals. The March 1997 Form ADV was not false because it did not contain this language and since the trading with East West had ceased.
For the foregoing reasons, I conclude that Duff & Phelps breached its fiduciary duty to its clients, including Local 710, during the relevant period. Duff & Phelps violated Sections 206(1) and 206(2) of the Advisers Act by directing brokerage to benefit East West, by paying $100,000 in soft dollars for Performance Analytics's reports, and by filing false Form ADVs with the Commission, all for the purpose of obtaining and retaining the Local 710 account.
The record establishes that Woessner knew from the time he received the proposal from Roach to direct brokerage to East West that the only purpose was to have Roach arrange for Duff & Phelps to get the Local 710 account. At their first meeting, Roach advised that he or Tringale had contacts with Local 710. However, Roach demanded extensive trading to generate brokerage for East West before he would "recommend" Duff & Phelps as an investment adviser to Local 710. This demand for brokerage was the equivalent of an advance fee scheme, and constituted a "red flag" such that Woessner knew, or was reckless in not knowing, that acquiring a client in this manner required heightened scrutiny by him as the Senior Vice President for Marketing.
After the December 1994 meeting with Local 710 officials and long before the May and June 1995 meetings, Woessner was sent a copy of Brown's January 30, 1995, letter to Hyland stating that it was the "strict policy" of Duff & Phelps not to refer brokerage in exchange for client referrals. Brown wrote that any violation of this policy "could, among other things, raise serious questions regarding the satisfactory performance of the fiduciary duties of the firm and the accuracy of the disclosures it makes to clients." Because of the importance of this policy, Brown insured that a copy of this letter was sent to Woessner. Based on this letter and his senior position at Duff & Phelps, I conclude that Woessner knew, or was reckless in not knowing, that the brokerage directed to East West violated Duff & Phelps's fiduciary duty to its clients. I further conclude that he knew, or was reckless in not knowing, that trading with East West and Roach's role in recommending Duff & Phelps as an investment adviser were material facts that he should have disclosed to the Local 710 Trustees, as a prospective client.
The Local 710 minutes describe the comments Woessner, Stevens, and Simmons made about why Duff & Phelps should be selected as an investment adviser. There is nothing in the minutes that Woessner, or anyone else, disclosed that Duff & Phelps directed brokerage to East West to have Roach recommend Duff & Phelps as an investment adviser. As a Senior Vice President for Marketing, Woessner was the person most responsible for obtaining new clients. Woessner's failure to disclose the referral arrangement with East West was reckless and rendered substantial assistance such that he aided, abetted, and caused the fraudulent scheme perpetrated by Duff & Phelps to secure Local 710 as a client.
I have concluded that the scheme perpetrated by Duff & Phelps extended through the period of the contractual relationship with Performance Analytics, which was extended to about July 1997. This brings the scheme within the five year period preceding the filing of the OIP and requires that Respondent's Motion to Dismiss on statute of limitations grounds be, and is hereby, DENIED. In addition, the Respondent's affirmative defense of laches is hereby DENIED. "The defense of laches is not available against a United States government agency acting in the public interest." David Disner, 52 S.E.C. 1217, 1223 (1997) (citing U.S. v. Summerlin, 310 U.S. 414, 416 (1940)); see also Kingsley, Jennison, McNulty & Morse, Inc., 51 S.E.C. 904, 911 n.30 (1993). There is no evidence to support any of the other affirmative defenses alleged and they are hereby DENIED.
When the Commission determines administrative sanctions, it considers:
[T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978)), aff'd on other grounds, 450 U.S. 91 (1981).
The Commission determines sanctions pursuant to a public interest standard. Thus, in addition to issues related to the violator, it "weigh[s] the effect of [the violator's] action or inaction on the welfare of investors as a class and on standards of conduct in the securities business generally." Arthur Lipper Corp., 46 S.E.C. 78, 100 (1975). The severity of sanctions depends on the facts of each case and the value of the sanctions in preventing a recurrence of the violative conduct. See Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963).
The Division requests sanctions pursuant to Sections 203(f), 203(i), 203(j), and 203(k) of the Advisers Act. The Commission must find willful violations to impose sanctions under Sections 203(f) and 203(i) of the Advisers Act. A finding of willfulness does not require an intent to violate the law, but merely an intent to do the act which constitutes a violation. See Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000); see also Steadman v. SEC, 603 F.2d at 1135; Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).
Cease and Desist
Section 203(k)(1) of the Advisers Act authorizes the Commission to enter a cease- and-desist order against a person who "is violating, has violated, or is about to violate any provision of this title, or any rule or regulation thereunder." It also permits the Commission to enter a cease-and-desist order against any person "that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation."
In KPMG Peat Marwick LLP, 74 SEC Docket 384, 428-38 (Jan. 19, 2001), the Commission considered the standard for issuing cease-and-desist relief. It concluded that it would consider, along with the risk of future violations, the Steadman factors in light of the entire record, noting that no one factor is dispositive. The Commission explained that the Division must show some risk of future violation, but stated that such showing should be "significantly less than" required for an injunction and that, "absent evidence to the contrary," a single past violation ordinarily suffices to establish that the violator will engage in the same type of misconduct in the future. See id. at 430, 435; see also Russell W. Stein, Exchange Act Release No. 47504, Advisers Act Release No. 2114, at 14-15 (March 14, 2003).
Applying these principles to the instant proceeding, the evidence establishes that Woessner had full knowledge of the reason brokerage was directed to East West from the time of his initial meeting with Roach. As the Senior Vice President for Marketing, he acted with scienter and withheld this information while influencing Local 710 to become a Duff & Phelps investment client. At the hearing, he persisted in advancing the idea that getting Rauscher Pierce's research was a primary factor in directing brokerage to East West. There is no merit to this contention. He showed no remorse for his participation in the scheme. While the record is not clear as to his current work association, his positions since leaving Duff & Phelps suggest that he is or could be active in some type of investment advisory capacity. It is therefore appropriate that a cease-and-desist order be issued.
Section 203(j) of the Advisers Act authorizes disgorgement of ill-gotten gains. Disgorgement is an equitable remedy that requires a violator to give up wrongfully obtained profits causally related to the proven wrongdoing. See SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-32 (D.C. Cir. 1989). It returns the violator to where he would have been absent the violative activity.
In determining a disgorgement amount, the Division has the burden of proving an amount that reasonably approximates the amount of unjust enrichment. See id. at 1232. ("Although the [Division] bears the ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment . . . the [Division's] showing of [Respondents'] actual profits on the tainted transactions at least presumptively satisfies the burden. [Respondents] [are] then obliged clearly to demonstrate that the disgorgement figure was not a reasonable approximation."). "[T]he calculation of those gains, lie within the discretion of the trial court, `which must be given wide latitude in these matters.'" SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1966) (quoting SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995)). "[A]ny `risk of uncertainty . . . should fall on the wrongdoer whose illegal conduct created that uncertainty.'" Patel, 61 F.3d at 140 (quoting First City Fin. Corp., 890 F.2d at 1232).
The Division seeks disgorgement based upon the compensation Woessner received for securing only the Local 710 contract in the approximate amount of $60,000. There is no contention that Woessner received any of the kickback monies that went to Baker and Close. There is no evidence to rebut the Division's contention that the suggested amount is not a reasonable approximation of his compensation from the Local 710 transaction and I accept it. Woessner will be ordered to disgorge $60,000, plus interest.
Civil Monetary Penalty
Section 203(i)(1)(B) of the Advisers Act authorizes the Commission to impose a civil monetary penalty against any person who has willfully aided and abetted a violation of the Advisers Act or the rules thereunder, after finding that such penalty is in the public interest. In determining whether a penalty is in the public interest, the Commission may consider six factors: (1) fraud or deliberate or reckless disregard of a regulatory requirement; (2) harm to others; (3) unjust enrichment; (4) previous violations; (5) deterrence; and (6) such other matters as justice may require. See Section 203(i)(3) of the Advisers Act; see also First Sec. Transfer Sys., Inc., 52 S.E.C. 392, 395-96 (1995); New Allied Dev. Corp., 52 S.E.C. 1119, 1130 n.33 (1996).
Section 203(i)(2)(B) of the Advisers Act, as adjusted, provides that a maximum amount of a civil penalty for each violation of the Advisers Act shall be $60,000 for a natural person if the violation involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.18
In the present case, Woessner's conduct involved aiding and abetting fraud and unjust enrichment. Deterring any future violations by imposing a monetary penalty is in the public interest. His conduct in failing to provide the Local 710 Board of Trustees with full and complete material information was willful. Therefore, a maximum second tier penalty in the amount of $60,000 is imposed.
Section 203(f) of the Advisers Act authorizes the Commission to impose remedial sanctions on any person who was associated with an investment adviser at the time of the misconduct. The sanctions may included a censure, the placing of limitations on the activities of such person, a suspension not to exceed twelve months, or a bar from association with an investment adviser. The Division requests that Woessner be barred.
Woessner has had a long career of approximately thirty years in the investment industry and there is no evidence of any prior violations. Without minimizing the seriousness of the violations in the instant proceeding, I believe that the sanctions imposed are adequate to protect the public interest. A bar from association will not be imposed.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record included the items set forth in the record index issued by the Secretary of the Commission on July 30, 2002.
Based upon the findings and conclusions set forth above:
IT IS ORDERED that, pursuant to Section 203(i) of the Investment Advisers Act of 1940, Chris Woessner pay a CIVIL MONETARY PENALTY of sixty thousand dollars ($60,000);
IT IS FURTHER ORDERED that, pursuant to Section 203(j) of the Investment Advisers Act of 1940, Chris Woessner DISGORGE sixty thousand dollars ($60,000), plus prejudgment interest at the rate established under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), compounded quarterly, pursuant to 17 C.F.R. § 201.600. Pursuant to 17 C.F.R. § 201.600, prejudgment interest is due from September 1, 1997, through the last day of the month preceding which payment is made; and
IT IS FURTHER ORDERED that, pursuant to Section 203(k) of the Investment Advisers Act of 1940, Chris Woessner CEASE AND DESIST from committing or causing any violations or future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.
Payment of the disgorgement and penalty shall be made by certified check, U.S. postal money order, bank cashier's check or bank money order payable to the Securities and Exchange Commission on the first day following the day this Initial Decision becomes final. The check and a cover letter identifying Respondent and Administrative Proceeding No. 3-10607, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to Martin F. Healey, Division of Enforcement, Boston District Office, Securities and Exchange Commission, 73 Tremont Street, Suite 600, Boston, Massachusetts 02108.
This Initial Decision shall become effective in accordance with and subject to the provisions of 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this Initial Decision may be filed within twenty-one (21) days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review, pursuant to 17 C.F.R. § 201.360(d)(1), within twenty-one (21) days after service of the Initial Decision, unless the Commission, pursuant to 17 C.F.R. § 201.360(b)(1), determines on its own initiative to review this Initial Decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the Initial Decision shall not become final as to that party.
Robert G. Mahony
Administrative Law Judge
1 During the relevant period, Duff & Phelps's principal place of business was located in Chicago, Illinois. In 1995, Duff & Phelps's parent, Duff & Phelps Corporation, merged with Phoenix Securities Group, Inc., then a subsidiary of Phoenix Home Life Mutual Insurance Company, located in Hartford, Connecticut. Ultimately, Duff & Phelps became a wholly owned subsidiary of Phoenix Investment Partners, Ltd., which is a wholly owned subsidiary of Phoenix Investment Management Company. Phoenix Investment Management Company is wholly owned by Phoenix Companies, Inc. Phoenix Companies, Inc. and its subsidiaries are collectively referred to herein as "Phoenix." See Duff & Phelps Inv. Mgmt. Co., Inc., Investment Advisers Act of 1940 Release No. 1984, Investment Company Act of 1940 Release No. 25200 (Sept. 28, 2001). Official notice is taken pursuant to Rule 323 of the Commission's Rules of Practice, 17 C.F.R. § 201.323.
2 "(Tr. ___.)" refers to the transcript of the hearing. I will refer to the Division's and Respondent's exhibits as "(Div. Ex. ___.)" and "(Resp. Ex. ___.)," respectively. The Division's and Respondent's post-hearing briefs shall be referred to as "(Div. Post-Hearing Brief at .)" and "(Resp. Post-Hearing Brief at .)," respectively.
3 Pedersen joined Duff & Phelps as Senior Vice President for Marketing in 1987. In the 1990s, he became Chairman of Duff & Phelps Management Company, which he describes as an honorary position because he was also President of Duff & Phelps Corporation. Pedersen sponsored Woessner for his position with Duff & Phelps. (Tr. 1304-07.)
Roach and Richard S. Tringale (Tringale), who had contacts with the Teamsters, developed a scheme to have union trustees provide pension funds to money managers who would execute trades through East West and its clearing broker, Rauscher Pierce. The trustees would then receive kickbacks from the brokerage fees generated by the trades. The scheme required trustees of Local 710, William Close (Close) and Robert Baker (Baker), now deceased, who was chairman of the Local 710 Investment Committee, to vote for whomever Roach selected to be the investment adviser for the Local 710's pension funds. Close received approximately $554,100, and Baker received $494,100 through bank accounts set up for them in the Cayman Islands. (Tr. 146, 167-70, 381, 391, 398-99, 470; Div. Exs. 179 at 13, 180 at 10.)
On December 18, 2000, Roach executed a plea agreement in the United States District Court for the Northern District of Illinois in which he agreed to plead guilty to conspiring to violate the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, and to offering and paying unlawful kickbacks to influence operations of employee benefit plans in violation of 18 U.S.C. § 1954, as well as to federal income tax charges. Roach testified in the instant proceeding as part of his plea agreement. He admitted lying in prior testimony given in a district court deposition and in testimony or statements given to the Commission, Federal Bureau of Investigation, and Department of Labor. (Tr. 376, 467, 469, 473, 491-95, 507-08, 525, 551; Div. Ex. 179.)
Co-defendants in Roach's criminal case were Close and Tringale. On May 1, 2000, Close executed a plea agreement in the United States District Court for the Northern District of Illinois in which he agreed to plead guilty to receiving kickbacks in violation of 18 U.S.C. § 1954 and money laundering in his capacity as a Local 710 trustee in violation of 18 U.S.C. § 1957. As part of his plea agreement, he agreed to testify in this proceeding. (Div. Ex. 180; Resp. Ex. 66.)
5 Carr owned another investment management company, Fiduciary Management Associates (FMA), that also traded through East West. (Tr. 173, 398.) Roach told Woessner that the amount of the commissions from the trades directed by Duff & Phelps to East West had to equal the amount of management fees paid by Local 710 "because we have to pay Baker and Close who [are] going to get you the money." (Tr. 401-02, 496-97.) However, in his investigative testimony, Roach stated that he did not tell Woessner at the breakfast meeting that he "had the trustees in his pocket." Woessner testified that they discussed obtaining the Teamsters account, but Roach did not mention any kickback arrangements with the Local 710 trustees. (Tr. 500, 1407-09, 1561-62.) Roach is a convicted felon who has admitted giving false testimony and statements in other related proceedings. I do not credit his hearing testimony that he told Woessner about the kickback scheme.
6 At Duff & Phelps, investment personnel assisted in evaluating research. During the years 1994-97, Diane Mustain (Mustain), one of four portfolio managers at Duff & Phelps, participated in the selection of brokers to execute trades for Duff & Phelps's clients. Duff & Phelps developed a two-tier list of firms with whom to do business. The list totaled about ten brokers with the five brokers in the lower tier being more industry specific. (Tr. 580-86.)
Top tier firms typically included Merrill Lynch, Morgan Stanley, and Goldman Sachs, all of which had good research services. Other than Prudential, Mustain testified that lower tier firms were not particularly helpful with research, and Rauscher Pierce was never in either tier as developed by the investment personnel. However, Rauscher Pierce does appear on the Duff & Phelps's "1995 Approved Equity Broker List," but not on its "1995 Soft Dollar Commission Budget List." (Tr. 606-07, 617; Div. Ex. 1.)
The marketing department of Duff & Phelps also influenced how trades were directed because it was trying to reward brokers, other than those providing research, including East West. Because this directed brokerage related to marketing purposes and not investment purposes, Mustain did not believe that it was in the best interest of the firm or its clients. This issue was discussed with Stevens who advised that Pedersen was a marketing person who wanted to acquire business. Stevens explained that "marketing, basically drove the firm" and, because they brought in business, Duff & Phelps had to do business with the people marketing wanted. (Tr. 587-89, 595-96, 632, 639; Div. Ex. 28.)
7 In November 1994, Alan Meder (Meder), Duff & Phelps's compliance officer, hired Mark Brown (Brown) to do the day-to-day compliance work. At Meder's direction, Brown worked on a compliance manual to formalize new procedures, including brokerage allocation, because there was no formal allocation procedure. Pedersen rejected the idea of having the Committee. However, at the recommendation of outside counsel, consent forms were used to select brokers with whom the firm did business. Brown continued to send out these forms until January 1996. (Tr. 78-79, 686-91, 715-16, 721, 774-76; Div. Exs. 1, 4, 86, 116.)
8 All trades that went through Rauscher Pierce for the benefit of East West were at $.05 per share. (Tr. 308.) Rauscher Pierce received $44,465 in commissions from Duff & Phelps for July 1-September 30, 1994; $87,110 for October 1-December 31, 1994; $83,315 for January 1-June 30, 1995; $236,216 for July 1-December 31, 1995, and $132,232 for January 1-March 31, 1996. In April 1996, there were two amounts totaling $16,750, $11,741 by LaSalle National Bank (LaSalle) and $5,009. There were no commissions in May, June, or July 1996. In August 1996, there was $2,260; September and October had $2,300 and $7,540, respectively, by LaSalle. LaSalle paid the commission for Local 710, but Duff & Phelps created the trades. (Tr. 530-31.) Stevens does not recall Woessner recommending a specific brokerage allocation amount to East West. (Tr. 834-36; Div. Ex. 166, Resp. Exs. 63-65.)
9 "Soft dollars" is defined as a "means of paying brokerage firms for their services through commission revenue, rather than through direct payments, known as hard-dollar fees." Barron's Dictionary of Finance and Investment Terms 540 (4th ed. 1995).
10 Duff & Phelps already had an account with Teamsters Local 705 (Local 705). About the time East West was to receive brokerage, Duff & Phelps received an additional $25,000,000 from Local 705. Woessner attributes this to Roach's contacts with the Teamsters. Woessner mentioned receiving this additional sum to Roach who said, "I'm glad that happened, hopefully, there will be more." (Tr. 1413.)
11 East West had relationships with two or three clearing brokers that generated approximately $500,000 in monthly commissions with about eighty to ninety percent going to Roach. (Tr. 398-99, 654-56.)
12 When Close became a trustee of Local 710 in 1993, the pension fund had about $800,000,000 and was invested in Government National Mortgage Association (Ginny Mae) bonds. About this time, the Local 710 Board of Trustees decided to invest in the stock market. Close testified that Baker and his advisers directed Local 710's investments. (Tr. 149-51, 160.)
13 Initially, Duff & Phelps received $74,550,209 on July 24, 1995, with additional amounts of $7 million on July 24 and on October 6, 1995; $11 million on November 21, 1995; $3.5 million on January 22, 1996; $5 million on April 11, 1996; $4 million on April 25, 1996; and $1 million on May 1, 1996. Although the Local 710 Board authorized $120 million, the total provided was $113,050,209. (Tr. 1147-52; Div. Exs. 99, 151.) The amount was reduced by $50 million in July 1996 purportedly because of Performance Analytics's concern about Duff & Phelps's performance after it merged with Phoenix. (Div. Ex. 125.)
14 Pedersen and Stevens understood that Duff & Phelps had a fiduciary duty to its clients. Pedersen further understood that if a client was acquired by payment of a referral fee, the client had to be so informed. (Tr. 886, 1343-45.)
15 Although Pedersen had known Golembo and was familiar with Performance Analytics since its inception, he testified that Stevens would have made the decision to execute a contract. (Tr. 1318, 1337, 1342.) Pedersen's involvement, if any, would have been a brief conversation with Stevens to the effect that it was "OK." (Tr. 1337, 1342.) I do not credit this testimony. Stevens did not learn of a relationship with Duff & Phelps and Performance Analytics until several years after he left Duff & Phelps. (Tr. 851-52.)
16 In 2000, Duff & Phelps reimbursed clients and former clients in the approximate amount of $579,000, as a credit against an agreement with the Commission to reimburse $613,000 as a result of its transactions with East West. (Tr. 90-91, 100, 1230-32; Div. Exs. 166, 168.) As part of a settlement with the Commission, reimbursements totaling approximately $100,000 were also made for commissions paid to Lakeview Securities, the clearing broker for Performance Analytics. (Tr. 1215-17; Div. Post-Hearing Brief at 30-31; Resp. Post-Hearing Brief at 26.)
17 After the February 14, 1996, meeting, Brown discussed with outside counsel what occurred during the meeting. Outside counsel informed Brown that unless Brown could point to a specific quid pro quo, then Duff & Phelps was in compliance with the laws and regulations because it constituted a gray area. (Tr. 786-800.)
However, had Brown known about the quid pro quo relationship Duff & Phelps had with East West, he would not have signed the Form ADVs. (Tr. 747.) Stevens was also assured by Duff & Phelps compliance personnel and outside counsel that the Form ADVs were "in proper order" and "appropriate" or he would not have signed them. (Tr. 913.)
18 See 17 C.F.R. §§ 201.1001 (1996 adjustment), .1002 (2002 adjustment).
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