U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21355 / December 29, 2009
Securities and Exchange Commission v. Harold H. Jaschke, United States District Court for the Middle District of Florida, Case No. 6:09-CV-2178-ORL-22-KRS (filed Dec. 29, 2009).
SEC Charges Houston-Based Broker With Defrauding Florida Municipalties
The Securities and Exchange Commission ("Commission") filed an action today charging a Houston-based broker with defrauding two Florida municipalities.
The Commission's complaint alleges that Harold H. Jaschke ("Jaschke") reaped commissions of over $14 million by engaging in unauthorized and unsuitable trading on behalf of the City of Kissimmee, Fla. and the Tohopekaliga Water Authority (collectively, the "Municipalities"), and by churning their accounts. While associated with the brokerage firm First Allied Securities, Inc., Jaschke lied to his customers about his fraudulent trading, which resulted in an aggregate, unrealized loss of approximately $60 million for a two year period.
The Commission's complaint, filed in federal court in Orlando, Fla., alleges that Jaschke engaged in a high risk, short term trading strategy involving zero-coupon United States Treasury bonds, the value of which were very sensitive to interest rate changes. For example, if interest rates were to increase by only 1%, the value of a 30-year bond would drop by 25%. Jaschke's risky trading strategy involved buying and selling the same bond within a matter of days, and sometimes within the same day. The complaint alleges that Jaschke exposed the Municipalities to greater risks when he leveraged their accounts using repurchase agreements. Jaschke employed repurchase agreements to finance the bond purchases the Municipalities would not otherwise have been able to afford. The complaint alleges this strategy dramatically increased the risks as Jaschke caused the Municipalities to borrow large sums of money to hold larger bond positions.
The complaint alleges Jaschke, age 49 of Houston, Tex., knew the Municipalities' ordinances prohibited his trading strategy as they required that their funds be invested with the paramount consideration to be safety of capital. Further, the complaint alleges Jaschke knew that the Municipalities prohibited the use of repurchase agreements for investment. According to the complaint, had the bond market not swung sharply in Jaschke's favor allowing the Municipalities to close their accounts with a modest profit, the Municipalities could have lost millions of dollars as a result of his misconduct.
The Commission's complaint alleges that Jaschke violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and aided and abetted violations of the broker-dealer books and records provisions, Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder. The Commission's complaint seeks a permanent injunction and disgorgement with prejudgment interest and a civil penalty.
In a related action, the Commission instituted settled administrative proceedings against Jeffrey C. Young, First Allied's former vice president of supervision, for failing to reasonably supervise Jaschke. The order found Young failed to respond adequately to red flags relating to Jaschke, and failed to take reasonable steps to ensure that First Allied's procedures regarding suitability were followed. The Commission's order suspends Young from acting in a supervisory capacity for nine months and orders him to pay a $25,000 civil penalty. Young consented to the entry of the order without admitting or denying the Commission's findings. For further information see Exchange Act Release No. 34-61247.