U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20425 / January 8, 2008
SEC v. K.W. Brown and Company, et al., Civil Action No. 05-CV-80367-JOHNSON (S.D. Fla.)
The Securities and Exchange Commission announced that on December 19, 2007, the Honorable Linnea R. Johnson, United States Magistrate Judge for the Southern District of Florida, entered judgments against K.W. Brown & Company (Brown & Co.), 21st Century Advisors, Inc. (21st Century) (collectively, the Advisers), K.W. Brown Investments, Inc. (Brown Investments), Kenneth Brown (Ken Brown), Wendy Brown and Michael Cimilluca (Cimilluca), finding them liable for violations of the anti-fraud and books and records provisions of the federal securities laws, after a nine day bench trial that commenced on September 10, 2007.
Specifically, the Court found the Defendants, knowingly or recklessly, engaged in an illegal cherry-picking scheme from September 2002 through at least June 2006 that netted the Defendants $4.5 million dollars while passing more than $9 million of losses onto unsuspecting advisory clients who placed their trust and confidence in Ken Brown and the Advisers. The Court also found the Defendants failed to implement policies and procedures to prevent this trading activity even though the Commission's examination staff, in June 2003, identified lax internal controls and numerous violations, including breach of fiduciary duty and undisclosed conflicts of interest related to trading in the Brown Investments' proprietary trading account.
The Court's Judgment enjoins the Advisers from violating Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and from violating Sections 204, 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 (Advisers Act) and Rules 204-1(a)(2) and 204-2(a)(8) thereunder; enjoins Ken Brown from violating, or aiding and abetting violations of, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rules 204-1(a)(2) and 204-2(a)(8) thereunder; enjoins Wendy Brown from violating, or aiding and abetting violations of, Sections 204 and 207 of the Advisers Act and Rules 204-1(a)(2) and 204-2(a)(8) thereunder; and enjoins Cimilluca and Brown Investments from aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act.
The Judgment holds the Defendants jointly and severally liable for disgorging $4.5 million in profits they obtained from the cherry-picking scheme and $296,147 in profits from Cimilluca's account and related accounts where he placed 99.65% winning trades. The Defendants are also ordered to jointly and severally pay pre-judgment interest of $983,586 on the $4.5 million in ill-gotten gains and $74,779 on the $296,147 Cimilluca diverted. Additionally, the Court imposed a third-tier civil penalty of $4.5 million dollars, collectively, on Defendants Brown & Co., 21st Century and Brown Investments; third-tier civil penalties of $250,000 on Ken Brown and Cimilluca; and a third tier penalty of $100,000 on Wendy Brown.
For further information regarding the Commission's complaint filed in April 2007, see Litigation Release No. 19209 (April 27, 2005).