SECURITIES AND EXCHANGE COMMISSION
In the Matter of
IMS/CPAs & ASSOCIATES,
OPINION OF THE COMMISSION
BROKER-DEALER AND INVESTMENT ADVISER PROCEEDINGS AND CEASE-AND-DESIST PROCEEDING
Grounds for Remedial Action
Registered investment adviser and its control persons misrepresented in public documents that they were not receiving any compensation for investment recommendations. Held, it is in the public interest to suspend the registration of IMS for six months; suspend Hall, Hargrave and Vernazza from being associated with an investment adviser for six months; order Respondents to cease and desist from committing or causing any violations and any future violations of the provisions they were found to have violated; and order Respondents jointly and severally to disgorge $75,032.78 minus the amount Vernazza refunded to clients, plus prejudgment interest from August 1, 1996.
Jane Katz Crist, of Jane Katz Crist, P.C., and Thomas D. Giachetti and Ashleigh C. Swayze, of Stark & Stark, P.C. for IMS/CPAs & Associates, Vernon T. Hall, and Stanley E. Hargrave.
Sheldon M. Jaffe, for Jerome B. Vernazza.
David B. Bayless, Eilleen M. Clavere, James A. Howell, and Karen G. Kwong, for the Division of Enforcement.
Appeal filed: January 30, 1998
Last brief received: June 2, 1998
Oral argument: July 26, 2001
IMS/CPAs & Associates ("IMS"), a registered investment adviser, as well as Vernon T. Hall, Stanley E. Hargrave, and Jerome B. Vernazza, control persons of IMS (collectively "Respondents") appeal from a decision of an administrative law judge.1 The Division of Enforcement also appeals, challenging the sanctions imposed by the law judge.
The law judge found that Respondents willfully violated Section 17(a) of the Securities Act of 1933,2 Section 10(b) of the Securities Exchange Act of 19343 and Rule 10b-5 thereunder.4 The law judge also found that IMS willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act") and that Vernazza, Hall, and Hargrave willfully aided and abetted and also were causes of these violations.5 In addition, the law judge found that Vernazza engaged in a primary violation of Sections 206(1) and 206(2) as a registered investment adviser. The law judge also found that Vernazza and IMS willfully violated Section 204 of the Advisers Act and Rule 204-3 thereunder, and that Hall and Hargrave willfully aided and abetted and also caused theseviolations.6 Finally, the law judge found that IMS, Vernazza, and Hargrave willfully violated Section 207 of the Advisers Act. 7
The law judge ordered that IMS's and Vernazza's investment adviser registrations be suspended for six months; and that Hall, Hargrave, and Vernazza be suspended from association with an investment adviser for six months. The law judge also ordered that they cease and desist from committing or causing any violations and any future violations of the provisions they were found to have violated; and that Respondents disgorge $75,032.78 (minus the amount Vernazza previously refunded to clients) plus interest from August 1, 1996.8
In addition to challenging the legal conclusions and certain factual findings of the law judge, Respondents assert that the sanctions assessed by the law judge are unduly harsh. They urge the Commission, at a minimum, to modify the disgorgement and vacate the Respondents' suspensions. The Division, however, asserts that the sanctions are insufficient in light of Respondents' conduct. It requests the Commission to suspend the investment adviser registrations of IMS and Vernazza for one year, and to suspend Vernazza, Hall, and Hargrave for one year from being associated with an investment adviser. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.9
IMS is an investment adviser with offices in Aptos and Riverside, California.10 Vernazza, who during the relevant period ran the Aptos office, also was individually registered as an investment adviser. As an investment adviser, he was a partner in IMS until June 1992, at which time IMS's Form ADV was amended to disclose that Vernazza merged his business as an individual investment adviser with that of IMS, and conducted that business under the name of IMS. Hall and Hargrave are both partners in IMS and, during the relevant period, ran the Riverside office.
In addition to their ownership of IMS, Hall, Hargrave, and Vernazza also owned Hall & Vernazza, CPAs ("H&V"), a certified public accounting firm that operates out of the same offices as IMS. According to Hargrave's testimony, because Hargrave is not a certified public accountant, California law precludes him from being a partner in H&V and requires that accounting business be conducted under the name of the accounting firm, H&V.11 Apart from this technical requirement that two separate legal entities be maintained in order to conduct accounting business, the record indicates substantial overlap in the services provided by, and clients serviced by, each of the two entities. The individual Respondents viewed the two entities interchangeably. For example, the firms use the same letterhead, which lists both firms. Hall and Hargrave refer to their business as "Hall & Vernazza, d/b/a IMS CPAs" in both their testimony and their curriculae vitae. The record does not include any evidence that IMS was registered with any authority as a "doing business as" for H&V, and Vernazza, in his testimony, was careful to note that the two firms are distinct legal entities. However, Hall's and Hargrave's use of the term "d/b/a" appears to be an informal way of indicating that the two entities are, de facto, the same.
In August 1991, H&V joined with the registered investment adviser World Money Managers ("World") to form the Tax-Planning Federal Cash Fund ("Tax Fund"), a portfolio of Qualified Investors Funds, Inc., an investment company. World and H&V were the Tax Fund's investment adviser and subadviser, respectively.12 The Tax Fund never generated enough business to operate profitably and, in June 1992, H&V and World decided to close it.
H&V agreed to pay the costs of closing the fund (estimated at $60,000) rather than charge these costs to the Tax Fund (and thereby to its shareholders). Respondents did not want closing costs to further depreciate the net asset value per share, since most of the Tax Fund's investors were Respondents' clients. World loaned H&V the $60,000. On June 22, 1992, each of the Respondents signed (as H&V partners) a promissory note for $60,000. The note provided, among other things, that:
[p]rincipal and interest shall be payable at the rate of Twelve Thousand Dollars ($12,000) for the period from July 1, 1992 to December 31, 1992, which shall be payable in full on January 1, 1993. Thereafter, principal and interest thereunder shall be payable in installments of Two Thousand Dollars ($2,000) per month on the first day of each month, beginning on the first day of February, 1993 and continuing until the first day of July, 1995, whereupon the entire remaining unpaid amount of principal and accrued interest thereon shall be due and payable.
Each of the individual respondents also personally guaranteed the note.
The day after signing the promissory note, H&V entered into a shareholder servicing agreement ("Servicing Agreement") with World to provide administrative support services to investors in the Permanent Portfolio Family of Funds ("PPF Funds"),13 a registered investment company for which World served as the investment adviser.14 The Servicing Agreement stated that H&Vwas to provide administrative support services to investors in the PPF Funds including the following: 1) assisting investors with PPF Funds account openings, closings, purchases, and redemptions; 2) confirming and reconciling all such transactions; 3) reviewing the activity in investors' PPF Funds accounts; 4) assisting investors in changing account options, designations, and addresses; 5) maintaining and distributing current copies of PPF Funds proxy statements and shareholder reports to PPF Funds investors; 6) providing assistance and review in designing materials to send to investors and potential investors and developing methods of making such materials accessible to investors and potential investors; 7) tax planning; and 8) responding to investors' and potential investors' questions about the PPF Funds, including the tax aspects of an investment in the PPF Funds. Respondents already provided many of these same services to their clients.
H&V's compensation arrangement under the Servicing Agreement was set forth in an attached schedule. The amount H&V was to be paid was to be determined by the "time, effort, and complexity" of its services. However, the total amount H&V could receive could not exceed certain percentages (or "caps") of the average net value of all issued and outstanding shares of common stock in the PPF Funds purchased by H&V's clients as a result of Respondents' efforts. There were three caps. One was a percentage of assets invested by clients who had previously invested in the Qualified Investors Funds, Inc. (including the Tax Fund) and who invested in either of two PPF Funds portfolios (Treasury Bill and Versatile Bond Funds) before June 30, 1995. The second, lower cap was a percentage of the assets of these same clients invested after June 30, 1995 or of any other H&V client who invested in either of the same two portfolios. H&V's compensation was also limited by a predetermined percentage of the average net asset value of the accounts of any H&V client who invested in a third PPF Funds portfolio (Aggressive Growth Portfolio), without regard to whether the client had previously invested in Qualified Investors Fund or the date the investment was made.15
The Servicing Agreement further provided that H&V would not be paid for any services rendered until the amount of assets invested by H&V clients equaled at least one million dollars. Although the agreement stated that it could be terminated by giving 60-days written notice of an intention to terminate, the letter transmitting the agreement from World to H&V stated that World would not terminate the Servicing Agreement while there was an outstanding balance due on the promissory note.
After entering the Servicing Agreement, Vernazza, Hall, and Hargrave all recommended to their clients that they invest in the PPF Funds. By the end of 1992, approximately 18 clients who had previously invested in the Tax Fund had invested over $3.5 million in the PPF Funds.16 Additional clients invested over $1.5 million in the PPF Funds. Prior to executing the Servicing Agreement, Vernazza and Hall had never recommended that their clients invest in the PPF Funds.17
H&V received $76,000 in payments under the Servicing Agreement through the end of 1995 and another $3,000 to $4,000 in 1996.18 World always paid the maximum under the cap set in the Servicing Agreement.19 H&V never sent invoices or documentation to World to substantiate any services provided under the Servicing Agreement.
The payments to Respondents under the Servicing Agreement were generally made in tandem with the payments Respondents madeon the note. For example, on April 11, 1993, World paid $13,060 pursuant to the Servicing Agreement, and, on the following day, H&V paid World $12,000 on the promissory note. On May 4, 1993, World paid $1,738 pursuant to the Servicing Agreement, and, on the following day, H&V paid World $2,000. Payments on the note did not follow the schedule set forth in the note. By the time of the hearing in this matter, the outstanding balance on the promissory note was $4,200.
In September 1992, IMS amended its investment adviser form ("Form ADV") to disclose that: 1) World and H&V had terminated their subadvisory contract in connection with the Tax Fund as of June 30, 1992; 2) as of June 22, 1992, World had retained H&V as its shareholder servicing agent for the PPF Funds; 3) H&V provided certain advisory and administrative support services for World such as "client tax planning concerns and questions about portfolios including tax aspects of an investment in the portfolio" of World's funds; and 4) World paid "H&V for the time, effort and complexity of services at an annual rate no greater than 5/10 of 1% for Treasury Bill Portfolio Investors, 6/10 of 1% for Versatile Bond Portfolio Investors and 5/10 of 1% for Aggressive Growth Portfolio Investors."
Vernazza amended his form ADV in August 1992. The Form ADV disclosed that:
[o]n June 22, 1992, World Money Managers retained Hall & Vernazza CPAs, as its shareholder servicing agent relative to the Permanent Portfolio family of Funds. Hall and Vernazza provide certain tax-planning and administrative support services with respect to investors and prospective investors in any Permanent Portfolio Fund. World Money Managers pays Hall & Vernazza for their time, effort and complexity of services. The applicant is a partner in Hall & Vernazza CPAs.
Neither IMS nor Vernazza, however, amended that portion of the Form ADV requiring disclosure if an adviser: recommends securities to clients in which it directly or through a related person has a sales interest (Part I, Item 21); recommends to clients that they buy investment products in which the adviser or a related person has a financial interest (Part II, Item 9D); or has an arrangement whereby the adviser or a related person receives an economic benefit from a non-client in connection with giving advice to clients (Part II, Item 13A).
IMS amended its Form ADV again in March 1993 and 1994 to indicate that it recommended to clients that they buy investment products in which IMS or a related person had a financialinterest.20 The attachment explaining this disclosure, however, provided no information about the Servicing Agreement in addition to that already provided in the 1992 Form ADV. Vernazza also amended his Form ADV in March 1993. He made no new disclosures with respect to the Servicing Agreement.
IMS's 1993 and 1994 annual filings (Form ADV-S) included disclosure statements from Hall and Hargrave that stated that Hall and Hargrave received "no fees, commissions, or compensation from any sponsor offering or selling any of the investments recommended" and that fees paid by World to H&V were for advisory and administrative support services to certain investors in the PPF Funds (the 1994 filing disclosure specified that these investors were IMS clients investing in PPF Funds).21 The representations made in Vernazza's Forms ADV-S for 1993 and 1994 were similar. Vernazza used the identical language concerning non-receipt of "fees, commissions or compensation" and also stated that "fees paid by World to Hall & Vernazza are for advisory and administrative support services with respect to investors in any of the Permanent Portfolio Family of Funds, Inc."
During the same period, all advisory contracts and engagement letters entered into by Respondents with new clients stated that "IMS warrants that they have not and will not receive any commission or any payment from, nor do they have any financial interest in, any recommendation made."
The antifraud provisions of the Securities Act and Exchange Act prohibit fraudulent and deceptive acts and practices in connection with the offer, purchase, or sale of a security; the Advisers Act prohibits advisers from defrauding clients orprospective clients.22 It is undisputed that all of the relevant conduct was in connection with the offer, purchase, or sale of a security and that the statements and omissions alleged to have been fraudulent were made to Respondents' clients and prospective clients. The issues before us are whether there were misleading or false statements, and if so, whether they were material and made with scienter.
1. Misleading Statements
The Division alleged that Respondents made several misleading or false statements between the signing of the Servicing Agreement and August, 1996:
The Division alleged that these statements were false and misleading because IMS was being paid "based on the assets of IMS's clients that were invested in the" PPF Funds, and because they "do not disclose the existence of the Note and the arrangement to repay it."
As a threshold matter, we note that, technically, payments were due to H&V under the Servicing Agreement, based on the assets invested by H&V clients. As discussed in the preceding section, however, the individual Respondents viewed IMS and H&Vfor all practical purposes as one and the same. Certainly for purposes of the Servicing Agreement, investments made by IMS clients triggered payments under the Servicing Agreement.23 Furthermore, because of the common ownership of IMS and H&V, the principals of IMS had an interest in any financial arrangement of H&V. Accordingly, we find as a factual matter that any benefit inuring to H&V under the Servicing Agreement inured equally to IMS and to the individual Respondents, at least for purposes of determining what disclosures were required under the Advisers Act.24
The Division argues that the Servicing Agreement was simply a sham, and that the true purpose of the payments under the agreement was to give Respondents fees for recommending the PPF Funds to their IMS clients for investment; the fees were then used to pay off the note. Thus, Respondents had a financial interest in recommending PPF Funds to their clients, one that they did not disclose. Respondents counter that the purpose of the payments was to give Respondents compensation that they earned by providing valuable services to World, and that they were paid according to the time, effort, and complexity of their services. This dispute about the purpose of the payments under the Servicing Agreement, however, obscures the more salient point alleged by the Division -- that Respondents had a financial interest in recommending PPF Funds to their clients because whether Respondents received any payment under the Servicing Agreement, and the maximum amount that they could be paid, depended on the amount of dollars invested by their clients in PPF Funds.
First, the Servicing Agreement provided that Respondents would receive no compensation for their work until at least $1 million of their clients' money was invested in the PPF Funds. Second, the maximum amount Respondents were entitled to receive under the Servicing Agreement was a function of how much money their clients invested in the PPF Funds, i.e., the cap (or maximum amount they could earn) was a percentage of the amount of assets invested by Respondents' clients in the PPF Funds. Thus, if the value of the time, effort, and complexity of services rendered by Respondents were greater than the cap, then Respondents would get paid less than the value of their services. If Respondents' clients invested less than $1 million in PPF Funds, Respondents would not get paid anything at all, no matterhow much work they performed under the Servicing Agreement. It makes no difference whether Respondents actually performed work to earn the money they received pursuant to the Servicing Agreement or whether the money they received was simply a fee for the business they referred. The amount of the payments Respondents were entitled to receive under the Servicing Agreement was determined by the amount of Respondents' customer money invested in PPF Funds. Thus, Respondents had a strong incentive to maximize their customers' investments in the PPF Funds.25 This constitutes a financial interest or sales interest in Respondents' recommendations that their clients invest in PPF Funds. Those recommendations, if followed, resulted in the possibility of increased compensation under the Servicing Agreement.
This reality is made vivid by Vernazza's billing. The amount initially billed under the Servicing Agreement was $60,000.26 This amount was higher than the cap for that billing cycle. Thus, the balance billed under the Servicing Agreement was brought forward every month to ensure that Respondents would ultimately get paid the full amount for which Vernazza had billed World. The more money IMS clients invested in PPF funds, the higher the cap; the higher the cap, the more Respondents would get paid each month; the more they got paid, the quicker the balance brought forward would be paid off.27
Respondents' Forms ADV, advisory contracts and engagement letters stated that they had no financial or sales interest in, or economic benefit from, any of their investment recommendations; thus, these documents contained false statements. Even the 1993 and 1994 amended Forms ADV submitted by IMS acknowledging the existence of a financial interest weremisleading. The explanation for that acknowledgment discussed only the existence of the Servicing Agreement and the fact that Respondents would be paid for services as a percentage of total assets in certain PPF Funds; it did not disclose that the amount Respondents would be paid under the Servicing Agreement was limited by the percentage of assets invested in the PPF Funds by Respondents' clients.
Our conclusion that the Forms ADV, advisory contracts, and disclosure statements and engagement letters contained false statements concerning Respondents' financial interest and economic benefit related to their recommendations does not depend on a determination of the true purpose for payments under the Servicing Agreement. However, the Division also alleged that Respondents' statements that they did not receive fees or compensation for any recommendation were false. To resolve this issue, we must determine whether the payments were for services rendered or in the nature of fees or commissions for client investments in the PPF Funds. The evidence is circumstantial but compelling that the Servicing Agreement was merely an arrangement by which Respondents could disguise the fact that World gave them the money for the Tax Fund's closing costs in exchange for Respondents sending business to World.
Respondents were unable to provide any contemporaneously compiled documentation of any of the work they supposedly performed under the Servicing Agreement. Bills sent by Respondents to World were not itemized, and Respondents did not compile any records internally providing a contemporaneous account of services provided by World. To accept that World's payments were for legitimate services being provided under the Servicing Agreement, we would have to accept both that World would make payment without even minimal substantiation of what it was receiving in return for its money, and that IMS would accept income for such services without any record of its own to document how it earned the income. It is not plausible that both firms had such poor business practices.28 Vernazza provided testimony at the hearing, together with documentation purporting to be a reconstruction of the services he had rendered. The law judge, however, determined that Vernazza's testimony was not credible.29
Additional facts buttress the conclusion that, at best, minimal work was performed under the contract. The services for which World purportedly contracted under the Servicing Agreement were already being performed for it by another entity, suggesting that the value to World of the Servicing Agreement lay in the referral of business rather than the services specified. Furthermore, the initial bill under the Servicing Agreement was for the same amount as the note. Payments made by Respondents on the note tracked with suspicious synchrony the payments made to Respondents under the agreement, rather than tracking the payment schedule set forth in the note.
Taken together, these facts demonstrate that the true nature of the arrangement between World and Respondents was that Respondents' promissory note to World would be paid off by Respondents' referral of business to World. 30 Thus, we conclude that Respondents had a financial interest in the recommendations they made to their clients to invest in PPF Funds, and that payments under the Servicing Agreement were in the nature of fees or commissions for the referrals, rather than for any services performed under the agreement. Statements tothe contrary in their disclosure statements, engagement letters, and advisory contracts were false.31
A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.32 Courts have recognized that economic conflicts of interest, such as undisclosed compensation, are material facts that must be disclosed.33 As a fiduciary, an investment adviser owes his clients undivided loyalty, and may not engage in activity in conflict with a client's interest. Respondents' financial interest in their recommendation of PPF Funds to their clients conflicted with their obligation to give their clients unbiased investment advice. We conclude that the misrepresentations and omissions made by Respondents in the various Form ADVs, engagement letters, and disclosure statements were material.
Scienter is a necessary element of a violation of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and Section 206(1) of the Advisers Act.34 Scienter need not be found to support a violation of Sections 17(a)(2) and (a)(3) of the Securities Act and Sections 206(2) and 207 of the Advisers Act.35 Scienter has been defined by the Supreme Court as a "mental state embracing intent to deceive, manipulate or defraud."36 Reckless behavior satisfies the scienter requirement.37
Vernazza negotiated the terms of the Servicing Agreement with World and signed it on behalf of H&V. Vernazza testified that he discussed the terms with Hall and Hargrave before entering into the agreement.38 Hargrave's testimony confirmedVernazza's on this point, adding that Vernazza asked Hall and Hargrave to review draft pages of the agreement and make suggestions. Hargrave also testified that he authorized Vernazza to enter into the Servicing Agreement. Hall testified that he knew that compensation under the agreement would be based on the net assets that clients had invested in the PPF Funds as well as services provided under the Servicing Agreement. We thus conclude that all three individuals had knowledge of the terms of the agreement giving rise to the financial interest requiring disclosure.
With respect to Respondents' knowledge of whether truthful disclosure was made in the documents at issue, Hargrave was responsible for filing IMS's Forms ADV, and Vernazza was responsible for filing his Forms ADV. In the September 1992 and March 1993 Forms ADV, Hargrave summarized the compensation structure under the Servicing Agreement. Hall testified that he routinely reviewed IMS's Forms ADV for factual accuracy before they were filed by Hargrave with the Commission.
In addition, Vernazza drafted his disclosure statements, and Hargrave was responsible for drafting his disclosure statement as well as Hall's disclosure statement. Hall testified that he reviewed his disclosure statements and approved the language used in his disclosure statement. We therefore find that Respondents acted with scienter when they made false or misleading statements in the relevant Form ADVs, disclosure documents, engagement letters, and advisory contracts.
Respondents claim that they did not intentionally conceal from their clients the receipt of fees from World, that their disclosure was merely inartful, and that failure to check particular boxes on the Forms ADV that would have exposed Respondents' conflict of interest was based on a misunderstanding of what they were required to disclose. Respondents also argue that the language in the engagement letters and disclosure documents stating that they "have not and will not receive any commission or any payment from, or have any financial interest in any recommendations made," was old language remaining from 1988when IMS and Respondents were not receiving compensation from World. They argue that retention of this language was merely an oversight, "sloppy business practices," and not a deliberate attempt to conceal from their clients their receipt of fees from World.
These arguments are unpersuasive. Their disclosures were not "inartful," they were false. It is not plausible that Respondents did not understand either the significance of their compensation arrangement with World, or that it represented a conflict of interest requiring disclosure. Nor is it plausible, given the many times the false disclosures were made, that Respondents' failure to correct the violative language was an "oversight." We find that IMS, Vernazza, Hall, and Hargrave knowingly or recklessly made the above misrepresentations in the various documents at issue in this matter. Accordingly, we conclude that the Respondents made material misrepresentations and omissions in the various Forms ADV, engagement letters, and disclosure statements and thereby willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
Based on the above analysis, we also find that IMS and Vernazza willfully violated Sections 206(1) and (2) of the Advisers Act and that Hall, Hargrave, and Vernazza willfully aided and abetted and caused IMS' violation of Sections 206(1) and (2) of the Advisers Act.39 To establish aiding and abetting we must find securities laws violations by IMS; knowledge or a general awareness by Respondents of IMS's wrongdoing; and that Respondents knowingly or recklessly rendered substantial assistance to IMS.40 These elements are met here by IMS's violation of the Advisers Act (which occurred because ofRespondents' conduct in making misstatements) and by our findings of Respondents' scienter with respect to the same misconduct.
We also find that IMS and Vernazza, as registered investment advisers, willfully violated Section 207 of the Advisers Act in filings with the Commission and that Hargrave, the IMS partner responsible for preparing and making IMS's investment adviser filings, willfully violated Section 207 of the Advisers Act.41 However, we dismiss the charge that IMS and Vernazza violated Section 204 and Rule 204-3 thereunder. Rule 204-3 requires that advisers furnish their clients and prospective clients with disclosure statements that are in compliance with Rule 204-1(b). That Rule in turn imposes a requirement that if any information in Items 9 and 10 of Form ADV Part I, or any of Part II, becomes inaccurate, an amendment must be filed to correct the information. Thus, Rule 204-1(b) simply triggers an update requirement in the event of material changes to the specified information after an accurate filing has been made. This Rule is not applicable to Respondents' conduct because their filings were false when filed, in violation of Section 207.
Respondents claim that the law judge committed error when she refused to allow Respondents' expert witness to testify.42 The proffered witness was a securities attorney. Respondents expected this witness to testify that Form ADV is usually prepared without the help of an attorney and does not have helpful instructions, that Vernazza and Hargrave did not answerany of the questions in Form ADV incorrectly, and that shareholder Servicing Agreements "have only recently evolved and there are no set rules as to what they do or do not include." Respondents argue that this testimony would explain the standard of care in the Los Angeles, California area and would "go to mitigation of sanctions and intent."43
The law judge did not commit error in excluding this testimony. Rule 320 of our Rules of Practice states that the hearing officer "may receive relevant evidence and shall exclude all evidence that is irrelevant." Whether Form ADV is difficult or not is irrelevant; investment advisers are obligated to respond to questions in Form ADV correctly and seek whatever assistance they need in fulfilling this obligation. This obligation is not diminished by any purported industry practice in eschewing assistance from counsel.44
In addition, whether Vernazza and Hargrave answered the questions in the Form ADV correctly goes directly to the issue of whether a violation occurred. This is a legal question within the purview of the law judge and the Commission to determine.45 Respondents offer no explanation of the relevance of the novelty of the shareholder Servicing Agreement, and we can see none. Moreover, Respondents are not being held liable for entering into the Servicing Agreement.
Respondents also assert that the law judge committed error when she disregarded Respondents' defense of reliance on the advice of counsel. In order to successfully assert a reliance-on-counsel defense, Respondents must demonstrate that they: 1) made complete disclosure to counsel; 2) requested counsel's advice as to the legality of the contemplated action; 3) received advice that it was legal; and (4) relied in good faith on that advice.46 Respondents assert that they relied on advice given by World's attorney. They argue that World's attorney draftedthe promissory note and the Servicing Agreement, and represented to Respondents that those documents were legal. They argue that, for purposes of this advice, World's counsel functioned as Respondents' counsel.
We reject this argument. Even assuming that World's counsel could be considered Respondents' counsel for this purpose (a dubious assumption), the central issue in this case involves Respondents' misrepresentations in documents filed with this Commission, in engagement letters, and in disclosure statements. It does not involve the legality of the Servicing Agreement or the promissory note, the only documents reviewed by World's counsel. Respondents do not contend that World's attorney reviewed any of the documents the accuracy of which is challenged here, much less that they requested, received, or relied on counsel's advice concerning the accuracy of their representations in those documents.
Respondents claim that the sanctions assessed by the law judge are unduly harsh. Respondents assert that a suspension of the registration of IMS and Vernazza is not warranted, and that disgorgement is inappropriate.47 The Division of Enforcement asserts that the six-month suspensions are insufficient in light of Respondents' conduct and requests that Respondents be suspended for a period of one year.
In determining appropriate sanctions we consider factors such as: the egregiousness of the Respondents' actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.48
Respondents assert, among other things, that no clients were harmed by the conduct at issue, and that Respondents' violations involved only one agreement. They argue moreover that they did not act with scienter. They point out that they have no prior disciplinary history and argue that the sanctions at issue are more severe than sanctions assessed in similar matters. Finally,Respondents contend that the sanction of suspension would have an adverse effect on an associated person of IMS who was not named in the order instituting proceedings.49 In addition, Vernazza urges that he be censured, instead of being suspended.50
Although we believe that the one-year suspensions sought by the Division are not necessary, we disagree with Respondents' assessment of their violations. Respondents' conflict of interest put them in a position where their recommendations to their clients could be more influenced by their own financial interest than by an assessment of client need. Clients were harmed because they were deceived concerning the critical issue of Respondents' interest by Respondents' false disclosures. Moreover, Respondents' fraudulent scheme spanned several years. Although Respondents do not dispute the most relevant facts underlying our findings of fraud, their failure to grasp the obligation to disclose resulting from those facts evidences a disturbing misapprehension of their duties towards their clients. Respondents' occupations present opportunities for similar future violations. Taken together, these considerations indicate a high likelihood of future misconduct. Accordingly, we find that it is in the public interest to suspend IMS's registration for six months and to suspend Vernazza, Hall, and Hargrave for six months from being associated with an investment adviser.
Respondents also urge the Commission to find that there is no basis for ordering disgorgement or, at a minimum, to find that the amount of disgorgement ordered was excessive. The disgorgement amount was $75,032.78, less the amount Vernazza refunded to his clients.51 This figure is based on two exhibits prepared by World's bookkeeper specifically for the hearing, one purporting to show the total amount paid by World under the Servicing Agreement, and the other purporting to show Respondents' payments to World under the note.
Respondents assert that they were not unjustly enriched because the services that H&V performed for World substantially exceeded the fees received by Respondents under the Servicing Agreement. However, as discussed above, regardless of the value of any services performed, Respondents would not have been paid anything had they not recommended that their clients invest in PPF Funds. These recommendations were made despite Respondents' conflict of interest, conflict which Respondents failed to disclose to their clients. All enrichment received as a result of this undisclosed conflict was unjust.
Respondents also claim that the exhibits prepared by World's bookkeeper were improperly admitted by the law judge. Respondents argue that the exhibits were improper hearsay, and that they could not cross-examine the bookkeeper to determine the accuracy of the two exhibits. They specifically challenge the accuracy of the amounts paid to World by Respondents. They also object that the exhibit showing World's payments to Respondents shows only a credit to Respondents, not that payment was actually received.
We reject Respondents' reasoning. We have repeatedly held that the hearsay nature of proffered testimony goes only to its relative probative value, not to whether it may be admitted.52 Here, the disgorgement amount is being determined by the amount of money received by Respondents, and is therefore not affected by any alleged inaccuracies in the exhibit purporting to show money paid by Respondents to World. Respondents do not challenge the accuracy of the amounts in the other exhibit, nor do they claim that they did not receive the amounts shown in that calculation. In fact, the exhibit is substantiated by the testimony of Vernazza at the hearing that IMS received $76,000 through the end of 1995 from World and another $3,000 to $4,000 in 1996. However, since this testimony would increase the disgorgement amount ordered, we will give Respondents the benefit of the lower amount previously ordered by the law judge of $75,032.78 minus the amount Vernazza refunded to clients, plus prejudgment interest from August 1, 1996, through the last day of the month preceding which payment is made at a rate of interest established under Section 6621(a)(2) of the Internal RevenueCode, 28 U.S.C. § 6621(a)(2), compounded quarterly, pursuant to Rule 610 of the Commission's Rules of Practice.53
Accordingly, we find that it is in the public interest to suspend IMS's registration for six months; suspend Hall, Hargrave and Vernazza from being associated with an investment adviser for six months; order Respondents to cease and desist from committing or causing any violations and any future violations of the antifraud provisions contained in Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; order IMS and Vernazza to cease and desist from committing or causing, and order Hall and Hargrave to cease and desist from causing, any violations and any future violations of the antifraud provisions contained in Section 206 of the Advisers Act; order IMS, Hargrave and Vernazza to cease and desist from committing any violations and future violations of Section 207 of the Advisers Act; and order Respondents to disgorge $75,032.78, jointly and severally, minus the amount Vernazza refunded to clients, plus prejudgment interest from August 1, 1996.
An appropriate order will issue.54
By the Commission (Commissioners HUNT and UNGER); Chairman PITT participating for quorum purposes, and abstaining.
Jonathan G. Katz
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45019 / November 5, 2001
INVESTMENT ADVISERS ACT OF 1940
Rel. No. 1994 / November 5, 2001
Admin. Proc. File No. 3-9042
In the Matter of
IMS/CPAs & ASSOCIATES,
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that the registration of IMS/CPAs and Associates be, and it hereby is, suspended for six months, effective 14 days from the date of this order; and it is further
ORDERED that Hall, Hargrave and Vernazza be, and hereby are, suspended from being associated with an investment adviser for six months, effective 14 days from the date of this order; and it is further
ORDERED that Respondents cease and desist from committing or causing any violations and any future violations of the antifraud provisions contained in Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that IMS/CPAs and Associates and Vernazza cease and desist from committing or causing, and Hall and Hargrave cease and desist from causing, any violations of the antifraud provisions contained in Section 206 of the Advisers Act; and it is further
ORDERED that IMS, Hargrave and Vernazza cease and desist from committing or causing any violations and any future violations of Section 207 of the Advisers Act; and it is further
ORDERED that Respondents disgorge $75,032.78, jointly and severally, minus the amount Vernazza refunded to clients, plus prejudgment interest from August 1, 1996; and it is further
ORDERED that the Division of Enforcement submit to the Commission a proposed disgorgement plan in accordance with Rule of Practice 610 within 60 days of payment of the amount of disgorgement.
By the Commission.
Jonathan G. Katz
|1||Vernazza was also individually registered as an investment adviser. In July, 1997, after the record closed in this proceeding, we issued an order permitting his registration to be withdrawn.|
|2||15 U.S.C. § 77q.|
|3||15 U.S.C. § 78j.|
|4||17 C.F.R. § 240.10b-5.|
|5||15 U.S.C. Section 80b-6.|
|6||15 U.S.C. Section 80b-4 and 17 C.F.R. Section 275.204-3.|
|7||15 U.S.C. Section 80b-7.|
|8||Rule 600 of our Rules of Practice specifies that prejudgment interest should begin on the first day of the month following each violation. 17 C.F.R. §201.600(a)(1997). The law judge found that it was "impossible to make that calculation on this record, therefore, for that reason and because of the extended time since these events occurred prejudgment interest shall be due from August 1, 1996, the first day of the month following Respondents' receipt of the final payment which totaled $75,032.78."|
|9||Rule of Practice 451(d), 17 C.F.R. § 201-451(d), permits a member of the Commission who was not at oral argument to participate in the decision of the proceeding if that member has reviewed the oral argument transcript prior to such participation. Chairman Pitt, who was not a member of the Commission at the time that the Commission held oral argument in this matter, has reviewed the transcript of the oral argument.|
|10||IMS also had offices in additional locations, but those offices are not at issue in this proceeding.|
|11||Notwithstanding this testimony, certain documents in the record (for example, IMS's Forms ADV and the promissory note discussed infra) describe Hargrave as a general partner of H&V. At the time of the events at issue, Vernazza owned fifty percent and Hall and Hargrave each twenty-five percent of H&V.|
|12||H&V is not registered with the Commission as an investment adviser. This blurring of functions between H&V and IMS is a further indication that the two entities were viewed as one by Respondents and their business associates. See n.11, supra, and accompanying text.|
|13||Terry Coxon, a limited partner of World, was also the President of the PPF Funds. PPF Funds had between $300 to $400 million under management in four portfolios: the Permanent Portfolio, the Treasury Bill Portfolio, the Versatile Bond Portfolio, and the Aggressive Growth Portfolio.|
|14||Vernazza states in his brief on appeal that "[d]iscussions with [World] led to a plan . . . whereby the Respondentswould perform services for [World] and in exchange [World] would credit Respondents with payments on the note." Similarly, Hall testified that it was his understanding that Vernazza negotiated with World "back in 1992 on a note and some method of working with them to pay off the note."|
|15||Respondents assert that the term "clients" in the service agreement was not restricted to their clients. However, the schedule to the service agreement specifically defines the word "clients" as H&V's clients.|
|16||At least five IMS clients who had previously invested in the Tax Fund subsequently invested in the PPF Funds at Vernazza's recommendation. Two of Hall's clients followed his recommendation and invested funds that were previously invested in the Tax Fund in the PPF Funds. In addition, at least six clients followed Hargrave's recommendation and invested all or part of the money they had invested in the Tax Fund in the PPF Funds.|
|17||It is not clear whether Hargrave had done so.|
|18||The record indicates that recommendations were made to, and investments were made by, IMS clients. The Servicing Agreement provided that payments to IMS were calculated by reference to investment by H&V clients. Since payments were made to H&V pursuant to the Servicing Agreement, World and Respondents clearly viewed the IMS client investments as satisfying the terms of the Servicing Agreement.|
|19||Vernazza asserts that he calculated the cap and sent World a letter asking for payment at the cap. Vernazza also stated that he informed World that because the services already provided were well above the amount allowed under the cap he would carry the billings forward cumulatively.|
|20||While IMS disclosed in its March 1993 Form ADV (Part II, question 9) that it recommended to clients that they buy or sell securities or investment products in which applicant or a related person had some financial interest, IMS described this interest as compensation tied solely to the services IMS provided. The response did not disclose that the amount of compensation was directly related to the amount of money clients invested. In addition, in response to another question on the form, IMS stated that it did not recommend securities to clients in which the firm, itself or through a related person, had any sales interest.|
|21||Investment advisers are required to provide their clients disclosure statements which may be either a copy of Part II of Form ADV or a document containing the information in Part II. 17 C.F.R. § 275.204-3.|
|22|| Section 17(a) of the Securities Act, 15 U.S.C. § 77q, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j, and Section 206 of the Advisers Act, 18 U.S.C § 80b-6.
As registered investment advisers, IMS and Vernazza are being held directly liable under Section 206(1) and (2). The other individual Respondents are charged with aiding and abetting IMS's violations of those provisions.
|23||See n.18 supra.|
|24||This conclusion is buttressed by Section 208(d) of the Advisers Act, which prohibits any person from doing, indirectly or through another person, anything that would be unlawful under the Advisers Act for the person to do directly.|
|25||For the same reason, it makes no difference whether the money paid to Respondents under the Servicing Agreement was used to pay off the promissory note. It does not even matter that there was a note.|
|26||This amount happened to be the amount due under the promissory note.|
|27||Respondents assert that the statement that they did not "receive fees or commissions from a sponsor offering recommendations or did not have a financial interest in any recommendation" is technically correct. They contend that the PPF Funds prospectus does not refer to World as a "sponsor," but says that World is the investment adviser to the funds. This argument is irrelevant. The Division does not argue that World was a sponsor, but rather that Respondents had a financial interest in recommending that their clients invest in the PPF Funds.|
|28||Respondents assert that World obviously thought the bills it received were adequate because it paid them. This reasoning merely begs the question, however, concerning what World thought it was paying for -- services under the Servicing Agreement, or compensation for the referral of business.|
|29||Vernazza objects on appeal to this finding of the law judge, arguing that it "ignored the actual work which Mr. Vernazzaperformed for [World] on the apparent ground of disbelief . . . ." Credibility determinations are the prerogative of the trier of fact, and are entitled to great weight in our review of the record. See Universal Camera Corp. v. NLRB, 340 U.S. 474, 496 (1951); Jacob Wonsover, Securities Exchange Act Rel. No. 41123 (March 1, 1999), 69 SEC Docket 694, 701 n.14, aff'd, 205 F.3d 408 (D.C. Cir. 2000)(law judge credited testimony when it was supported by documentary evidence or the evidence of other witnesses and the Commission found no basis to question that determination); Litwin Securities, Inc., 52 S.E.C. 1339, 1342 n.13 (1997)(the Commission will reject initial fact-finder's determination as to credibility only when the record contains "substantial evidence" to the contrary); C.James Padgett, 52 S.E.C. 1257, n.65 (1997) (credibility determination of the initial decision maker is entitled to considerable weight as it is based on hearing witnesses' testimony and observing their demeanor), aff'd sub nom, Sullivan v. SEC, 159 F.3d 637 (D.C. Cir. 1998)(Table), cert. denied, Nye v. S.E.C., 525 U.S. 1070 (1999).|
|30||Respondents, in denying that the Servicing Agreement was a sham, argue vociferously that they did not purposefully hide the existence of the Note. This is not relevant. The issue is whether various disclosures falsely indicated that Respondents had no conflict of interest in their investment recommendations, not whether they hid the mechanism by which the conflict was created.|
|31||Respondents' argument that the Division failed to prove that any of IMS's clients "were not orally provided with correct and complete information" is unavailing. Once the Division made its prima facie case by establishing that misstatements were made, the burden shifted to Respondents to establish, if possible, that verbal statements cured the false written ones. See Donald T. Sheldon, 51 S.E.C. 59, 77 (1992) aff'd, 45 F.3d 1515 (11th Cir. 1995).|
|32||Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). See also TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).|
|33||SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 200-201 (1963) (suppression of information material to an evaluation of the disinterestedness of investment adviser operates as a fraud or deceit on purchaser); Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979)(financial writer's failure to disclose ownership of securities in company demonstrated lack of objectivity and was material); Gary Plastic Packaging v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,756 F.2d 230, 242 (2d Cir. 1985), cert. denied, 498 U.S. 1025 (1991)(commissions that defendants receive on the CD's they sell to the public are relevant and must be disclosed); SEC v. Hasho, 784 F.Supp. 1059, 1110 (S.D.N.Y. 1992)(the failure to disclose certain commissions deprives the customer of the knowledge that his registered representative might recommend a security based upon the registered representative's own financial interest rather than the investment value of the recommended security).|
|34||See Aaron v. S.E.C., 446 U.S. 680, 695, 697 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Steadman v. S.E.C., 603 F.2d 1126, 1134 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981); Scienter requirement in actions under antifraud provision of Investment Advisers Act, 133 A.L.R. Fed. 549 (and cases there cited).|
|35||Aaron v. S.E.C., 446 U.S. at 696; S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 196 (1963); Steadman, 603 F.2d at 1134; Kingsley, Jennison, McNulty & Morse, Inc. et. al., 51 S.E.C. 904, 911 n.28 (1993).|
|36||Ernst & Ernst v. Hochfelder, 425 U.S. at 193 (1976).|
|37|| See, e.g., Howard v. Everex Systems, Inc., 228 F.3d 1057 (9th Cir. 2000). The Ninth Circuit defined recklessness as:
"an extreme departure from the standards of ordinary care,  which presents a danger of misleading buyers or sellers that is either known or is so obvious that the actor must have been aware of it." Id. at 1063 (citations omitted.)
See also Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 272-73 (3d Cir. 1998) ("recovery on a federal securities fraud claim requires a showing of scienter: a deliberate or reckless misrepresentation of a material fact"), cert. denied, 525 U.S. 811 (1998).
|38||The purpose of the Servicing Agreement and Respondents' knowledge of that purpose is further revealed in documents that evidence the negotiations between Vernazza and World. In a letter faxed from Vernazza to Hall and Hargrave onJune 10, 1992, prior to the completion of the Servicing Agreement, Vernazza stated that, "Here is what I received from Terry (World) last night. It does not include any reference to credits from people we switch over or new business in the future. He suggested yesterday we be made sub-advisers to the Versatile Bond Portfolio as a method of crediting the note." In that same letter to Hall and Hargrave, Vernazza asks his partners to "[p]lease give me your thoughts. We should have a conference call. I will be back in my office by 3:30 this afternoon."|
|39||Section 206, in relevant part, states that it is "unlawful for any investment adviser . . . directly or indirectly -(1) to employ any device, scheme or artifice to defraud any client or prospective client; (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client . . . ."|
|40||See, e.g., Sharon M. Graham, 53 S.E.C. 1072, 1080-81 (1998), aff'd, 222 F.3d 994 (D.C. Cir. 2000); Russo Securities, Inc., 53 S.E.C. 271, 278 n.16 (1997); Donald T. Sheldon, 51 S.E.C. 59, 66 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995). As we have stated previously, a finding that someone has willfully aided and abetted a violation necessarily makes that person a "cause" of the violation. See Sharon M. Graham at 1085 n.35; Dominick & Dominick, Inc., 50 S.E.C. 571, 578 n.11 (1991).|
|41||Section 207 of the Adviser Act prohibits "any person willfully to make any untrue statement of a material fact in any registration statement or report filed with the Commission . . . or willfully to omit to state in any such application or report any material fact which is required to be stated therein."|
|42||Vernazza also asserts that the law judge committed error when she did not allow him, after the hearing was completed, to submit a letter from a client with various attachments. He characterizes this information as exculpatory because the client claims to have been informed by Vernazza of the fees at issue. The law judge denied Vernazza's request to admit the letter as a late-filed exhibit for several reasons, including that "the material appears similar in content to some of the thirty-six exhibits which Respondents offered and I allowed in evidence at the hearing." We have reviewed the document, and agree with the law judge that the exhibit contains information that is repetitive or irrelevant, and therefore find that the law judge did not commit error in excluding the exhibit.|
|43|| Respondents request that the Commission consider as supplemental authority a decision subsequently issued by the same law judge, Terence M. Coxon, Alan M. Sergy, World Money Managers, and World Money Securities, Inc., Initial Decision Rel. No. 140, (Apr. 1, 1999), 69 SEC Docket 1405 (appeal pending)("World case"). Respondents also request that the instant matter be remanded to the law judge to explain differences in the law judge's rulings on expert testimony and the sanctions assessed in the two cases. Respondents assert that the sanctions in these two cases are disparate (three-month suspensions in the World case and six months suspensions in this matter), and that the law judge's rulings on expert opinion are in direct conflict, allowing an expert to testify in the World case and not in this case.
We deny Respondents' request to remand this matter and to consider the World case as supplemental authority. The facts and issues in the World case and this one are different and therefore a comparison of the sanctions in the two cases would not be helpful. In addition, the experts in these cases had different qualifications and their testimony was offered for different purposes and as to different subjects.
|44||At oral argument, Respondents supplemented their argument by referencing discussion in our proposed amendments to Part II of Form ADV. See 65 Fed. Reg. 20524 (proposed Apr. 17, 2000). Citing language therein to the effect that "the format of Part II does not lend itself to meaningful, clear disclosure," and to the proposed online glossary of key terms, Respondents now argue that this language concedes that form ADV is confusing and difficult to fill out. As the discussion of the proposed amendments demonstrates,however, the focus of the proposed amendments is on situations where accurate responses to Part II can yield misleading results. 65 Fed. Reg. at 20532. That is a very different situation from this case, where the responses in Part II were false, or omitted material facts.|
|45||See Marx & Co., Inc. v. Diners' Club, Inc., 550 F.2d 505, 510 (2d Cir.), cert. denied, 434 U.S. 861 (1997)(admission of the testimony of a securities expert at a jury trial who testified to the legal obligations of the parties was an error of law). Respondents cite Crom Corp. v. Crom, 677 F.2d 48 (9th Cir. 1982); U.S. v. Cavin, 39 F.3d 1299 (5th Cir. 1994); and Bonhiver v. Rotenberg, Schwartzman & Richards, 461 F.2d 925 (7th Cir. 1972). These cases are inapposite. Crom concludes merely that it was within the district court's discretion to admit expert testimony. Cavin explains that an attorney should be allowed to introduce expert testimony of another attorney on the ethical and professional dilemma an attorney faces when a client uses his services to accomplish a fraud. The court stressed that such testimony would be admissible solely as evidence of the defendant attorney's state of mind, and stressed that the testimony could not be used to prove what the law is, since that must be decided by the court. 39 F.3d at 1308. Bonhiver stands for the proposition that, in a legal malpractice case, expert testimony from a lawyer is necessary to establish the relevant standard of care.|
|46||SEC v. Savoy Industries, Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981). Respondents argue a different standard based on their interpretation of California law. California law is not controlling here.|
|47||Respondents do not dispute the propriety of the cease-and-desist order. As noted earlier, Vernazza is no longer registered as an investment adviser.|
|48||Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979)(quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978), aff'd on other grounds, 450 U.S. 91 (1981).|
|49||Respondents claim that Peter Lucier, who according to IMS's Form ADV became affiliated as of January 1992, will be adversely effected. While we realize IMS's suspension may negatively impact Lucier, we find that it nonetheless is in the public interest to suspend IMS's registration.|
|50||In July, 1997, after the record had closed in this proceeding, we issued an order allowing Vernazza's withdrawal of his registration as an investment adviser. Vernazza is no longer subject to registration requirements due to recent amendments to the Investment Advisers Act. Accordingly, the suspension of Vernazza's registration imposed by the law judge has been rendered moot.|
|51||Vernazza made these refunds to his clients after the Commission initiated its investigation.|
|52||See, e.g., Kevin Lee Otto, Exchange Rel. No. 43296 (Sept. 2000), 73 SEC Docket 964, 969 aff'd, 253 F.3d 960 (7th Cir. 2001), cert. pending, 70 U.S.L.W. 3193 (U.S. Sept. 7, 2001); and Harry Gliksman, Exchange Act Rel. No. 42255, 71 SEC Docket 767, 1999 WL 1211765 at 4 (December 20, 1999), and cases cited therein, appeal pending, No. 00-70141 (9th Cir.)(Gallagher); No.00-70258 (9th Cir.)(Gliksman).|
|53||Respondents agree "disgorgement need only be a reasonable approximation of profits causally connected to the violation." SEC v. First City Financial Corporation, Ltd., 890 F.2d 1215, 1231 (2d Cir. 1989)(noting that a disgorgement figure must reasonably approximate the amount of unjust enrichment but not necessarily prove the precise amount of ill-gotten gains). Respondents, however, assert that only a small percentage of services that they provided were for their clients and that they should be entitled to compensation for the services that they provided to non-clients. As we stated above, IMS would not have been entitled to any compensation unless their clients invested in the PPF Funds. Accordingly, we find that all proceeds received under the Servicing Agreement constitute unjust enrichment.|
|54||We have considered all of the contentions advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed herein.|