U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19197 / April 21, 2005
Securities and Exchange Commission v. Thomas J. Gerbasio, et al., Civil Action No. 05 1833 (BWK) (E.D. Pa.)
COMMISSION CHARGES THOMAS J. GERBASIO AND RAYMOND L. BRAUN, JR. WITH FRAUD BASED ON MUTUAL FUND MARKET TIMING SCHEME
Fiserv Securities, Inc. to Pay $15 Million, and Former Officer to Receive Nine-Month Supervisory Suspension, in Settlement of Administrative Proceedings Based on Failure to Supervise Gerbasio and Braun
The Securities and Exchange Commission ("Commission") announced that on April 21, 2005, it filed a civil action in the United States District Court for the Eastern District of Pennsylvania against Thomas J. Gerbasio, of Ocean City, New Jersey, and Raymond L. Braun, Jr., of New York, New York, two former employees of Fiserv Securities, Inc. ("Fiserv"), a broker-dealer headquartered in Philadelphia, Pennsylvania. Without admitting or denying the allegations of the Complaint, Braun agreed to the settlement described below.
The Commission's Complaint alleges that, from August 2002 until April 2004, Gerbasio was in charge of a Fiserv office in New York City that placed tens of thousands of market timing trades for certain hedge fund customers (the "New York Market Timing Office"). Gerbasio also was the Vice President of the Mutual Fund Department for Fiserv in Philadelphia. Braun was the Mutual Funds Operations Supervisor of Fiserv's New York Market Timing Office, and reported directly to Gerbasio.
The Complaint alleges that, from at least August 2002 until October 2003, Gerbasio and Braun participated in a scheme to defraud hundreds of mutual funds and their shareholders by engaging in deceptive practices in connection with market timing by two hedge fund customers. Specifically, in response to hundreds of notifications from mutual funds monitoring and restricting excessive trading, including "kick-out letters" rejecting market timing trades, defendants employed a variety of deceptions and evasions on behalf of the hedge fund customers, including misrepresenting the nature of their trades to the funds, opening dozens of accounts under different names to conceal the customers' identities from the funds, entering trades in amounts that would avoid the funds' detection triggers, trading in funds that were less likely to detect the unwanted market timing, and advising the customers on strategies to conceal their market timing from funds that objected to and/or prohibited this trading.
The Complaint further alleges that, using these fraudulent tactics, defendants placed thousands of market timing trades for the hedge fund customers that would have otherwise been rejected by the fund companies. Between August 2002 and October 2003, the two hedge fund customers placed 37,965 market timing trades. As a result of their conduct, Gerbasio and Braun received at least $454,797 and $125,318, respectively, in ill-gotten gains.
The Complaint alleges that Gerbasio and Braun violated Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and seeks permanent injunctions, disgorgement together with prejudgment interest, and civil penalties against both defendants. Braun has consented to the entry of a final judgment permanently enjoining him from engaging in the violations set forth above, and ordering him to pay disgorgement together with prejudgment interest in the amount of $133,576. The final judgment waives payment of all but $20,000, and does not impose a civil penalty, based on Braun's sworn financial statements submitted to the Commission.
The Commission also announced the institution and settlement of enforcement proceedings against Fiserv and Dennis J. Donnelly, Fiserv's former Chief Operating Officer, finding that Fiserv and Donnelly failed reasonably to supervise Gerbasio and Braun, with a view to preventing their violations of the federal securities laws. Without admitting or denying the Commission's findings, Fiserv has agreed to a censure; to pay a total of $15 million, consisting of $5 million in disgorgement and a $10 million civil penalty; and to undertake measures to prevent future misconduct. Donnelly agreed to pay a civil penalty in the amount of $50,000, as well as a nine-month suspension from association in a supervisory capacity with any broker or dealer.