U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19170 / April 6, 2005
Securities and Exchange Commission v. Jeff Thomas Allen, et al., Civil Action No. 05-453 (W.D. Pa.)
COMMISSION CHARGES JEFF THOMAS ALLEN AND JAMES BARLOW SMITH WITH FRAUDULENT TRADING SCHEME
The Securities and Exchange Commission ("Commission") announced that on April 6, 2005, it filed a civil action in the United States District Court for the Western District of Pennsylvania against Jeff Thomas Allen, of Pittsburgh, Pennsylvania, and James Barlow Smith, of Saxonburg, Pennsylvania. Allen was the President, CEO, Chief Investment Officer and majority shareholder of Advanced Investment Management, Inc. ("AIM"), a now-defunct investment adviser previously registered with the Commission. Smith was AIM's Vice President of Equity Trading. Without admitting or denying the allegations of the Complaint, Allen has consented to the entry of a final judgment permanently enjoining him from engaging in the violations set forth below, and ordering him to pay a civil penalty in the amount of $175,000.
The Commission's Complaint alleges that AIM's investment strategy involved matching or exceeding the performance of the S&P 500 Index through the use of derivatives rather than direct investment in the equities that comprised the Index. Most clients required AIM to maintain not more than 100 percent market exposure in their accounts such that any market movement in the S&P 500 Index would cause comparable percentage movements in the market value of their portfolio. A few clients authorized market exposure levels as high as 120 percent.
The Complaint further alleges that, from at least January 2002 through July 2002, Allen and Smith conducted unauthorized trading in numerous client accounts, and in violation of advisory agreements. In particular, from April through July 2002, during a time when the S&P 500 Index dropped almost 29 percent, the defendants improperly increased market exposure in an effort to recover from past losses. This trading caused market exposure in some accounts to reach levels as high as 500 percent, which, in turn, caused more than $415 million in client losses. In order to conceal the effect of their trading, which otherwise would have been disclosed in monthly account statements, Allen and Smith sold the unauthorized positions before month-end, and repurchased them shortly thereafter. This strategy of "window dressing" prevented clients from discovering the scheme.
The Complaint alleges that defendants have violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder; and that Allen has violated, and Smith has violated or aided and abetted violations of, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Complaint seeks permanent injunctions, disgorgement together with prejudgment interest against Smith, and civil penalties against both defendants.
The Commission acknowledges the cooperation of the Commodity Futures Trading Commission and the U.S. Department of Labor, who are today filing separate actions against Allen as a result of his conduct.