UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("SEC") alleges:
NATURE OF THE ACTION
1. This case involves an egregious abuse of trust and fraudulent dealings by defendant Bryan James Hawes ("Hawes") who misappropriated at least $1.2 million from investors for whom he purported to act as a financial planner and investment adviser. Hawes, through his schemes, stole from people he had known for many years, including his own elderly parents. He was also indiscriminate in what he stole - misappropriating investors' retirement savings and funds they had set aside for college tuition.
2. Hawes conducted his schemes through two businesses he created: Financial Management Advisory Services, Inc. ("FMAS"), an investment adviser business, and Financial Management Services, Inc., an insurance business ("FMS" and collectively, with Hawes and FMAS, the "Defendants").
3. The first fraudulent scheme involved the purchase of variable and other annuities. Hawes, directly and indirectly, falsely told certain investors that he had purchased, as they had directed, annuity policies as investment vehicles. In fact, for some investors, Hawes never bought the policies but rather took the policy "premium" for himself. For other investors, Hawes initially purchased the annuities but later liquidated them without their knowledge or authorization, keeping the proceeds for himself. The second fraudulent scheme involved Hawes charging exorbitant and unauthorized fees to investors who believed he was managing their assets. Hawes then hid his fraud from these investors by sending account statements to the investors showing false, inflated balances and omitting the unauthorized fee deductions. Hawes was able to deduct the unauthorized fees from the investors' accounts without their knowledge because he had access to their accounts as the investors' investment adviser.
4. This court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77v(a)], Sections 21(d)(3), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d)(3)(A), 78u(e), and 78aa], and Sections 209 and 214 of the Investment Advisers Act of 1940 ("Advisers Act") [15 U.S.C. §§ 80b-9 and 80b-14].
5. Defendants, directly or indirectly, made use of the means or instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices, and courses of business alleged herein.
6. By engaging in the conduct alleged in this Complaint, each defendant violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. Hawes and FMAS also violated Sections 206(1) and (2) of the Advisers Act [15 U.S.C. §§ 80b-6(1) and (2)]. Unless restrained and enjoined, the defendants will likely continue to engage in this illegal conduct. The SEC accordingly seeks (a) preliminary and permanent injunctions against future violations by the defendants; (b) a verified accounting from the defendants of the receipt and disbursement of all investors' funds; (c) disgorgement of all proceeds that the defendants have received from their unlawful activities with prejudgment interest; (d) a freeze of the defendants' assets pending the resolution of this action; and (e) statutory civil money penalties.
7. Bryan James Hawes, ("Hawes") age 52, is a United States citizen and a resident of Pittsburgh, Pennsylvania. Hawes is the President of Financial Management Advisory Services, Inc., and Financial Management Services, Inc. Hawes is an investment adviser registered in Pennsylvania, and was at one time licensed to sell insurance in Pennsylvania. Hawes has managed approximately $3 million in assets in approximately 85 accounts on behalf of his clients.
8. Financial Management Advisory Services, Inc., is a Pennsylvania corporation and an investment adviser business registered in Pennsylvania. FMAS is not registered with the SEC. FMAS has offices located in Wexford, Pennsylvania. FMAS began operations in 1991 and is the business through which Hawes purports to manage brokerage accounts and investments on behalf of investors.
9. Financial Management Services, Inc., is also a Pennsylvania corporation and, according to public documents, is an "insurance agency." FMS's office location is the same as FMAS. FMS began operations in 1983. FMS is the business through which Hawes purports to sell insurance-related services and products to investors, including certain variable annuity products.
10. Alpha & Omega Transportation, Inc. ("Alpha & Omega") is a Pennsylvania corporation with offices in Pittsburgh, Pennsylvania. According to public records, Alpha & Omega is a limousine rental company owned and operated by Hawes.
Hawes's Scheme To Defraud Investors
11. Hawes has defrauded numerous investors over several years. Hawes developed two primary schemes for defrauding investors. First, Hawes has operated FMS, an insurance business through which Hawes has purported to sell, on behalf of legitimate companies, certain variable and other annuity products to investors as investments. At least some of these annuity products required an up-front premium paid to Hawes, FMS, or FMAS, with the expectation that the investment would appreciate in value and would be paid out periodically. On at least two occasions, Hawes took investors' premiums for his own purposes and did not use the premiums to purchase the annuities. Hawes concealed his misappropriation of the policy premiums by sending false documents to the investors showing the purported existence and value of the annuities.
12. Hawes operated the second aspect of the fraud through his investment adviser company, FMAS. As an investment adviser, Hawes managed brokerage accounts on behalf of his investor clients and charged a specified management fee for his services based on the assets under management. Hawes managed investor brokerage accounts held with Fidelity Investments ("Fidelity"). Using his account access as the investors' investment adviser, Hawes misappropriated investor funds from accounts held with Fidelity by transferring cash out of the accounts to his own account. Hawes also stole investor money by charging unearned, unauthorized, exorbitant "management fees" in the Fidelity accounts. Hawes concealed these unauthorized transfers and fees by sending investors false account statements overstating the value of their accounts and omitting the fraudulent transfer and fee deductions.
Bryan Hawes's Parents
13. Bryan Hawes's parents are some of the earliest victims identified to date of Hawes's fraudulent scheme. Hawes's mother discovered the fraud not long after Hawes's father passed away in early 2003.
14. In the early 1990s, Hawes's father purchased three annuity financial instruments through Bryan Hawes, two in Hawes's mother's name and one in Hawes's father's name. The annuities were purchased as retirement investments that Hawes's parents expected would produce future income streams. The three annuities were each purchased for an up-front "premium." Two of the annuities were purchased for approximately $116,000 each; the premium amount for the third annuity was approximately $125,000. The premiums were given to Bryan Hawes. Bryan Hawes purported to purchase the three annuities on behalf of his parents from London Pacific Life & Annuity Company ("London Pacific"). Bryan Hawes provided periodic statements to his parents that purported to summarize the value of the annuities. For example, in June 2001, statements for two of the annuities showed "accumulated values" of $194,876.68 and $224,647.19. In February 2002, a statement for the third annuity reflected an accumulated value of $281,020.06.
15. After Hawes's father died, Hawes's mother asked Bryan Hawes for information about the annuities. Hawes sent his mother a letter on March 21, 2003 stating that the "contract values" for the three annuities were $279,926.16, $186,860.21, and $245,092.85. In fact, none of these annuities existed in 2003, and Hawes's statements were false. More specifically, two of the annuities for which Bryan Hawes had sent account statements to his mother had once existed with London Pacific, but had been drawn down and ultimately liquidated in 1996. London Pacific had no record for the third annuity existing in the names of either of Bryan Hawes's parents; moreover, London Pacific confirmed in a April 16, 2003 letter that "Bryan Hawes was not the writing agent for" that policy number.
16. In fact, Bryan Hawes never purchased the third annuity. He kept the funds for his own purposes. Hawes also drew down and liquidated the other two annuities and used the proceeds for his own purposes. In all, Hawes misappropriated at least $350,000 from his parents through his fraudulent sale of annuity products.
The California Investors
17. In 1994 and 1995, Hawes purported to assist a married couple who were his clients (the "California investors") with certain financial arrangements. Hawes purported to arrange for the California investors to invest in two annuity products, one annuity through Mass Mutual and a variable annuity through the Life Insurance Company of Virginia ("Life of Virginia"). The California investors paid Hawes $75,000 on or about August 1995 to purchase the Life of Virginia variable annuity. The California investors intended to use this investment to fund their son's eventual college education. Hawes provided various documents associated with the Life of Virginia variable annuity to the California investors, including an initial account application, policy information, and periodic statements. For example, on August 17, 1998, Hawes sent the California investors a "summary of [their] investments." The summary supplied by Hawes stated that the Life of Virginia variable annuity had a "value" as of June 1998 of $135,440. The documents Hawes supplied were false. Hawes never purchased an annuity through Life of Virginia. Rather, Hawes misappropriated the upfront "premium" paid by the California investors for the variable annuity.
18. In addition, the California investors also maintained two IRA accounts with Fidelity that Hawes managed. The California investors received account statements from both Fidelity and Hawes for these IRA accounts for many years. After June 2002, however, the California investors no longer received account statements from Fidelity but instead received statements only from Hawes.
19. The account statements sent to the California investors by Hawes and FMAS match the account statements sent by Fidelity as of June 30, 2002. However, as of September 30, 2003, the account statements Hawes sent to the California investors were no longer accurate or consistent with the actual account balances at Fidelity. According to the statements Hawes sent, the value of the two accounts was approximately $68,000 and $60,000, respectively. However, the Fidelity statements reflect lower total values for the accounts. Specifically, the Fidelity statements show that the cash position for each of the California investors' IRA accounts was $13,500 less than in the statements he sent to the California investors because Hawes improperly withdrew that amount from each account. The California investors had not authorized such withdrawals. Therefore, in addition to stealing the $75,000 variable annuity investment from the California investors, Hawes also misappropriated $27,000 in cash from their brokerage accounts, which was approximately 21% of the total value of the accounts, for a total theft of $102,000.
The Colorado Investors
20. A second couple, currently Colorado residents (the "Colorado investors"), also retained Hawes and FMAS for brokerage services when they lived in Pittsburgh, Pennsylvania. The Colorado investors opened three brokerage accounts through Hawes and FMAS: a joint account for the husband and wife and two individual IRA accounts (one each for the husband and wife). The accounts were originally opened with one brokerage firm, but the accounts were later transferred at Hawes's urging to Fidelity in 1997.
21. The Colorado investors entered into an "Investment Advisory Contract" with Hawes in March 1995 that governed the fees Hawes and FMAS could charge for managing the Colorado investors' accounts. According to the contract, FMAS management fees "are billed at the end of each quarter . . . and are based on the value of the account at the end of the quarter." FMAS fees were to be charged at various percentage rates depending on the portfolio's value.
22. The Colorado investors are retired. The Colorado investors' funds invested with Hawes, originally totaling approximately $1 million, comprised their entire retirement savings. They rely on the income generated from their investments to pay their living expenses. Since approximately 2002, the Colorado investors have not received account statements from Fidelity but only from FMAS and Hawes.
23. According to statements sent by Hawes, the Colorado investors' joint account had a value of $724,293.53 as of September 30, 2003, including $292,893.71 in cash. In fact, the actual value of the account was $251,010.93. During 2002 and 2003 Hawes and FMAS withdrew all of the available cash from the Colorado investors' accounts and through the use of the margin account stole additional funds from the Colorado investors' account. These fees were not authorized by the Colorado investors or permitted by their contract with Hawes and FMAS. The Colorado investors did not know of any such withdrawals, as they were not reflected in the false accounts statements sent to them by Hawes.
24. The account statements for Fidelity show that since July 2002 Hawes and FMAS withdrew approximately $461,500 from the Colorado investors' joint account, or nearly two-thirds of the account's total value. Included in these unauthorized withdrawals are $251,500 of "advisor fees" and two "transfers" of $100,000 and $110,000 to a numbered, but unnamed, account in July and August 2002. From July 2002 to date, Hawes has misappropriated at least $450,000 from the Colorado investors and concealed that fact by sending inaccurate account statements to the Colorado investors.
Other Investor Losses
25. Hawes and FMAS also manage approximately 80 other accounts for approximately 50-55 individuals through Fidelity Investments. Based on a review of the account activity, unauthorized transfers and excessive and unauthorized management fees appear to have been made and charged in numerous of these accounts. Initial calculations indicate that Hawes and FMAS have charged more than $655,000 in fees in 2003 to his various clients (including charges to the Colorado investors and California investors). The total value of the assets in Fidelity investor accounts managed by Hawes was approximately $2,166,000 as of December 31, 2002. Accordingly, as of October 31, 2003, Hawes charged in management "fees" 30% of the value of the assets under his control.
26.Hawes directed some of the misappropriated funds to Alpha & Omega, Hawes's limousine rental company. In 2003, Hawes transferred approximately $109,000 from his FMAS Fidelity account to Alpha & Omega. Such funds represent unauthorized fees and transfers deducted from investor accounts and properly belong to various clients of Defendants.
Fraud in Connection With the
27. Paragraphs 1 through 26 are realleged and incorporated by reference.
28. As more fully set forth above, the Defendants each knowingly or recklessly made numerous materially false and misleading statements to investors regarding the existence and amount of their variable annuity products managed by Hawes through FMS and FMAS.
29. By reason of the foregoing, the Defendants each violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5].
Fraud in the Offer or Sale of Securities in Violation
30. Paragraphs 1 through 29 are realleged and incorporated by reference.
31. As more fully set forth above, the Defendants each knowingly or recklessly made numerous materially false and misleading statements to investors about the existence and amount of their variable annuity products managed by Hawes through FMS and FMAS.
32. By reason of the foregoing, the Defendants each violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
Fraud Upon Clients of Investment Adviser in Violation
33. Paragraphs 1 through 32 are realleged and incorporated by reference.
34. Hawes and FMAS, directly and indirectly, engaged, for compensation, in the business of advising clients as to the advisability of investing in, purchasing, or selling securities. Accordingly, each defendant acted as an investment adviser within the meaning of Section 202(a)(11) of the Advisers Act [15 U.S.C. § 80b-2(a)(11)].
35. As more fully set forth above, Hawes and FMAS knowingly, recklessly or negligently made numerous materially false and misleading statements to investors regarding the amount of fees removed from their accounts under management of Hawes and FMAS.
36. By reason of the foregoing, Hawes and FMAS violated Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. §§ 80b-6(1) and (2)].
PRAYER FOR RELIEF
WHEREFORE, the SEC respectfully requests that this Court enter a judgment:
(i) permanently enjoining Defendants Hawes, FMAS, and FMS from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)], and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5];
(ii) permanently enjoining defendants Hawes and FMAS from violating Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. §§ 80b-6(1) and (2)];
(iii) ordering Defendants Hawes, FMAS, and FMS to each provide a verified accounting and disgorge all ill-gotten gains from the conduct alleged herein, together with prejudgment interest;
(iv) ordering Defendants Hawes, FMAS, and FMS to pay civil monetary penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)], Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)], and Section 209(e) of the Advisers Act [15 U.S.C. § 80b-9(e)];
(v) ordering Alpha & Omega to disgorge all assets it received from the other Defendants from the conduct alleged herein, together with prejudgment interest; and
(vi) granting such other relief as this Court may deem just and appropriate.
REQUEST FOR JURY TRIAL
Plaintiff requests a jury trial.