Securities Act of 1933
Rel. No. 8276 / August 26, 2003
Securities Exchange Act of 1934
Rel. No. 48409 / August 26, 2003
Investment Company Act of 1940
Rel. No. 26167 / August 26, 2003
Investment Advisers Act of 1940
Rel. No. 2163 / August 26, 2003
Admin. Proc. File No. 3-9657
In the Matter of PIPER CAPITAL MANAGEMENT, INC., |
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is,
ORDERED that Piper Capital Management, Inc. (PCM) be, and it hereby is, censured; and it is further
ORDERED that PCM shall cease and desist from committing or causing any violation or future violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 13(a)(3) of the Investment Company Act of 1940, Rule 22c-1 promulgated pursuant to Section 22(c) of the Investment Company Act of 1940, Section 31(a) of the Investment Company Act of 1940 and Rule 31a-1 thereunder, Section 34(b) of the Investment Company Act of 1940, and Section 207 of the Investment Advisers Act of 1940; and it is further
ORDERED that PCM's registration as an investment adviser be, and it hereby is, revoked; and it is further
ORDERED that PCM be, and it hereby is, assessed a civil money penalty of $2,005,000 payable, in accordance with Rule 601(a), 17 C.F.R. § 201.601(a), no later than 21 days after the service of this order; and it is further
ORDERED that Marijo A. Goldstein be, and she hereby is, censured; and it is further
ORDERED that Goldstein shall cease and desist from committing or causing any violation or future violation of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder, IC Act Rule 22c-1, IC Act Section 31(a) and Rule 31a-1 thereunder, and IC Act Section 34(b); and it is further
ORDERED that Robert H. Nelson be, and he hereby is, censured; and it is further
ORDERED that Nelson shall cease and desist from committing or causing any violation or future violation of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder, IC Act Rule 22c-1, IC Act Section 31(a) and Rule 31a-1 thereunder, and IC Act Section 34(b); and it is further
ORDERED that Amy K. Johnson be, and she hereby is, censured; and it is further
ORDERED that Johnson shall cease and desist from committing or causing any violation or future violation of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder, IC Act Rule 22c-1, IC Act Section 31(a) and Rule 31a-1 thereunder, and IC Act Section 34(b); and it is further
ORDERED that Molly J. Destro be, and she hereby is, censured; and it is further
ORDERED, that Destro shall cease and desist from committing or causing any violation or future violation of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder, IC Act Rule 22c-1, IC Act Section 31(a) and Rule 31a-1 thereunder, and IC Act Section 34(b); and it is further
ORDERED that payment of the amount ordered herein shall be made by certified check, U.S. Postal money order, bank cashier's check, or bank money order payable to the Securities and Exchange Commission. The check and a cover letter identifying the respondent and the proceeding designation, Administrative Proceeding File No. 3-9657, shall be mailed or delivered by hand to the Comptroller,Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22812. A copy of the cover letter shall be sent to Gregory P. Von Schaumburg, Esquire, Securities and Exchange Commission, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604.
By the Commission.
Jonathan G. Katz
Secretary
Endnotes
1 Piper Capital Management, Inc., Initial Decision No. 175 (Nov. 30, 2000), 73 SEC Docket 3175. Originally, seven respondents were charged in this proceeding. Worth V. Bruntjen entered into a settlement with the Commission. See Worth V. Bruntjen, Securities Act Rel. No. 7634 (Jan. 26, 1999), 68 SEC Docket 3377. We make findings here with respect to Bruntjen solely for the purposes of this opinion.
The law judge concluded that the Division did not establish that Edward J. Kohler failed reasonably to supervise Bruntjen and Goldstein. That determination is final. Edward J. Kohler, Securities Act Rel. No. 8229 (Apr. 30, 2003).
2 15 U.S.C. § 77q(a). The law judge dismissed allegations that Goldstein violated Securities Act Section 17(a)(1).
3 15 U.S.C. § 78j(b).
4 17 C.F.R. § 240.10b-5.
5 15 U.S.C. § 80a-34(b).
6 15 U.S.C. § 80a-13(a)(3).
7 The law judge also found that PCM violated Section 207 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-7, by making untrue statements of material fact concerning Bruntjen's educational background in registration applications and reports filed with the Commission. PCM did not contest its willful violation of IA Act Section 207 or the $5,000 civil money penalty that the law judge assessed for this violation. That determination is final.
8 17 C.F.R. § 270.22c-1.
9 15 U.S.C. § 80a-30(a).
10 17 C.F.R. § 270.31a-1.
11 See supra note 7.
12 See supra note 1.
13 For a detailed explanation of the various types of pass-through securities, see generally Frank J. Fabozzi, Bond Markets, Analysis and Strategies (1989) and The Handbook of Fixed Income Securities, 5th ed. (1997).
14 The impact of declining interest rates is referred to as "prepayment" or "contraction risk." Conversely, the impact of rising interest rates is called "extension risk."
15 The distinguishing feature of a CMO is that, unlike a pass-through MBS, the CMO allows for the distribution of prepayment risk among the various bond tranches.
16 Duration is defined as the percentage change in the value of a bond for a 1% change in the yield curve.
17 The company subsequently changed its name to Piper Funds, Inc.
18 A "AAAf" rating meant that investments in the Fund had an overall credit quality of AAA.
19 During this period, the Fund's marketing materials included a pie chart disclosing the Fund's portfolio composition. Centered below the pie chart in each instance were two columns labeled "Average life" and "Implied duration" followed by the Fund's calculations (in whole or fractional years) for these measures.
20 A copy of this speech was included in the marketing materials that Bruntjen and Goldstein presented in an August 1993 meeting with a potential Fund investor.
21 The decision to invest in a dollar roll transaction depends on the value of the coupon (interest) received from the pass-through security in the intervening period between commitment and the settlement date. Assume the MBS is currently valued at 100. The investor believes that the market will drop. The investor therefore enters into a forward contract to purchase the security at 95.
At settlement, if the MBS market price is higher than the forward price, the investor will have an unrealized gain fromthe transaction. Conversely, a lower market price results in an unrealized loss. Thus, if the market price is $96, the investor purchases the MBS at the forward price of $95, and simultaneously sells it at the market price for a $1 profit. If, however, the market price at settlement is $94, the investor must purchase the MBS at the $95 forward price and incur a $1 loss.
In a dollar roll transaction, the investor both enters into a forward contract to sell the security in the future at 100 and enters into a contract to repurchase the security at 95. This 5 point spread is the "drop," which is the inducement to the investor to take the risk of entering into the contract. Sometimes, instead of delivering the security, the investor simply "rolls" his position over into a new forward contract and repurchase contract.
If the investor has sufficient credit, the investor may engage in dollar roll transactions regardless of whether the investor owns the security. However, if the investor does not own the security, the investor is at risk for any change in market price for the security when the investor must fulfill the contract at settlement.
22 As a result of the dollar roll transactions, the Fund was at risk for any price decline. If the securities' prices dropped and the Fund did not directly own the securities, it was still obligated to fulfill the forward contract at the higher price. This feature of dollar roll transactions classifies them as "leveraged" transactions and contributes to the sensitivity of the portfolio to interest rates.
23 For example, in an interview with Goldstein and Bruntjen published by Morningstar Closed-End Funds, Inc. barely a month after issuance of the January 1993 Fund prospectus, Bruntjen stated: "The [dollar] roll program is one that transfers risk from someone who doesn't have a use for it - the mortgage creator - to someone who is willing to assume that market risk for a limited period of time in exchange for a fee. Our funds are able to absorb the market risk of mortgages during the 90-to-120 day creation period that others, who are leveraged and have regulators looking over their shoulders, cannot tolerate. In this process, our funds serve as warehouses for mortgage originators."
Goldstein added: "At times we will realize market losses and at times realize gains from that transaction. But the fee is always positive, and, especially in a steep yield-curve environment, those fees are very substantial."
24 The "derivatives" referred to the Fund's CMOs, including inverse floaters, which at that time constituted 93% of the portfolio.
25 Pursuant to Section 17(a)(1), it is unlawful "to employ any device, scheme, or artifice to defraud." Section 17(a)(2) proscribes obtaining money or property by means of any untrue statement or omission of material fact. Section 17(a)(3) makes it illegal "to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon" a securities purchaser.
26 Violations of Securities Act Section 17(a)(1), Exchange Act Section 17(b), and Exchange Act Rule 10b-5 require scienter. See Aaron v. SEC, 446 U.S. 680, 701-02 (1980). Scienter is satisfied by a showing of recklessness. See, e.g., Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990). Violations of Securities Act Sections 17(a)(2) and (a)(3) do not require a showing of scienter. See, Aaron, 446 U.S. at 697; SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997).
27 The law judge made no finding with respect to compliance with industry standards for the Fund's semi-annual and annual reports, Fund summaries, and letters to shareholders.
28 See, e.g., SEC v. Dain Rauscher, Inc., 254 F.3d 852, 857 (9th Cir. 2001) (industry standard is a relevant factor for determining the standard of care, but not the controlling standard); Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 274 (3d Cir. 1998) (even a practice that is universal within an industry may still be fraudulent) (citing Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1171-72 (2d Cir. 1970)).
29 Dain Rauscher, 254 F.3d at 856. PCM cites the district court decision in Dain Rauscher, which the Ninth Circuit reversed. Of the four other cases cited by PCM, none involved the adequacy of disclosures relating to investment strategy risks, and the analyses in those cases do not support PCM's argument. See Platsis v. E.F. Hutton & Co., 946 F.2d 38, 41 (6th Cir. 1991) (broker's failure to disclose to customer the amount of the production credits and markups earned on inventory sales did not violate Rule 10b-5 as there was "no established regulatory dutyto disclose these items" and therefore neither an intent to deceive nor an extreme departure from the standards of ordinary care); Messer v. E.F. Hutton & Co., 847 F.2d 673 (11th Cir. 1988) (no violation of the Commodity Exchange Act in connection with unauthorized trading on a brokerage account and reference to "industry practice" was in regard to the brokerage's decision to straddle the plaintiff's account, not the brokerage's decision to make unauthorized trades); Shivangi v. Dean Witter Reynolds, Inc., 825 F.2d 885 (5th Cir. 1987) (broker's failure to disclose to customer account executive compensation earned on trades does not itself establish scienter where customer did not establish that such information is ordinarily disclosed in the securities industry, which fact, if established, "might" have indicated to broker the danger of nondisclosure); Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir. 1981) (no violation of Rule 10b-5 where record overwhelmingly indicates that the parties thought themselves under no duty to disclose in detailed fashion in the prospectus and sales materials an indenture's provisions for remote future contingencies, and plaintiff concedes insufficient evidence of scienter to establish continuing fraud).
30 See, e.g., Rent-Way Sec. Litig., 209 F. Supp.2d 493, 522 (W.D. Pa. 2002) (fraud of officer or employee is imputable to corporation when committed within scope of employment and for corporation's benefit).
31 Aiding and abetting requires a primary violation committed by another party; general awareness or knowledge by the aider and abettor that his or her actions are part of an overall course of conduct that is improper; and substantial assistance by the aider and abettor in the conduct that constitutes the violation. See, e.g., Robert L. McCook, Securities Exchange Act Rel. No. 47572 (Mar. 26, 2003), 79 SEC Docket 3421; Sharon M. Graham, 53 S.E.C. 1072, 1085 n. 35 (1998)(respondent that willfully aidedand abetted another's security law violations necessarily is a "cause" of those violations), aff'd, 222 F.3d 994 (D.C. Cir. 2000).
32 The law judge found that Goldstein acted negligently but not recklessly with respect to the Fund's disclosures. The Division did not appeal this finding.
The law judge also found that Goldstein violated Exchange Act Section 10(b) and Rule 10b-5. We dismiss these allegations with respect to the Fund's disclosures. See Aaron v. SEC, 446 U.S. 680, 701-02 (1980) (scienter is an element of a violation of Exchange Act Section 10(b) and Rule 10b-5); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976) (scope of Section 10(b) does not extend to negligent conduct).
The law judge found that Goldstein was not liable for aiding and abetting or being a cause of the Fund's violation of Section 13(a)(3), a finding that the Division has not appealed.
33 Goldstein also asserts that she cannot be found liable for a primary violation of Securities Act Section 17(a) and IC Act Section 34(b) for disclosure violations in Fund disclosure documents, citing Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir. 1998); Winkler v. Wigley, 2000 WL 1786345 (2d Cir. 2002) (unpublished); In re Silicon Graphics, Inc. Sec. Lit., 970 F. Supp. 746 (N.D. Cal. 1997); and In re Gap Stores Sec. Lit., 457 F. Supp. 1135 (N.D. Cal. 1978). All of those cases involve liability of a "secondary actor" for a violation under Exchange Act Section 10(b).
Unlike the individuals in those cases, Goldstein, as a result of her management authority over the Fund, and her authority over content of the disclosure documents and marketing materials, is a "primary" actor. Moreover, Goldstein fails to acknowledgethat a secondary party can still be liable as a primary violator. Cf. In re Enron Corp. Sec. Derivative & ERISA Lit., 235 F. Supp.2d 549, 588-91 (S.D. Tex. 2002) (adopting and applying as a reasonable interpretation of Section 10(b) text the Commission's proposed test that a secondary party can be liable in a private suit as a primary violator of Section 10(b) if the person, acting with the "requisite scienter," "creates" a misrepresentation relied upon by the plaintiff). See also Silicon Graphics, 970 F. Supp. at 759 ("group pleading doctrine" recognizes a presumption that statements in "prospectuses, registration statements, annual reports, press releases, or other 'group-published information,' are the collective work of those individuals with direct involvement in the day-to-day affairs of the company") (citations omitted).
34 At the hearing, Goldstein initially identified Bruntjen as the person who "typically" would make purchase and sale decisions for the Fund. However, when shown her investigative testimony from an NASD proceeding, Goldstein conceded that she had previously acknowledged that she or Bruntjen typically made these decisions.
35 A Piper Jaffray broker also testified that he would direct substantive questions about the Fund's performance to Goldstein.
36 For example, a "Quarterly Update" from 1989 used to solicit broker interest in selling the Fund contained a "PCM Profile" that interviews Bruntjen and Goldstein and identifies them as the "co-managers" of the Fund. Goldstein answered the majority of interview questions concerning management of the Fund. In marketing materials from an August 1993 presentation to a potential investor in the Fund, Goldstein is listed as one of the presenters. See also supra note 23 (describing Goldstein's interview with Morningstar).
37 See SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir. 2001).
38 See supra note 32.
39 The law judge concluded that Goldstein either knew or should have known that characterizing the Fund's Sale/When-issued Program as a risk volatility hedge was materially misleading. Goldstein observes that this disclosure appears only in the Fund's prospectus. Goldstein notes that the law judge also found "the actual degree of Goldstein's participation in the substantive input with respect to PJIGX prospectuses [to be] indeterminate." In light of our finding of Goldstein's liability for materially misleading disclosures relating to the Fund's implied duration, we do not reach her liability for Fund Sale/When-issued Program disclosures.
40 See, e.g., Dowling v. Narragansett Cap. Corp., 735 F. Supp.1105, 1119 (D. R.I. 1990) ("While the line between half truths and untruths is sometimes difficult to draw, both trigger a duty to disclose any additional or contradictory facts that may be necessary to present shareholders with a complete picture and prevent them from being misled.").
41 Although there were a number of Fund prospectuses during the 1988 through April 1994 period, with minor variation, the quoted language remained consistent.
42 A mark is a dealer's estimate of a security's market price, which ordinarily falls within the market's bid/offer spread.
43 Goldstein described the "Bloomberg system" as an electronic system that communicated market news and information. Using this system, Goldstein was able to analyze financial data to "fair value" a bond. The Respondents refer to this process as "Bloomberg analytics."
44 Kidder Peabody & Co., which had sold to the Fund the majority of CMOs it held, was the primary source for the Fund's securities marks.
45 IFTC purchased PAS to perform the accounting work of calculating the Fund's NAV.
46 Goldstein had primary responsibility for the Fund's daily portfolio manager review. If Goldstein was unavailable, Winsonperformed this review for the Fund.
47 In the event that Goldstein elected to override a mark received from IFTC, she would direct either Destro or Johnson to contact IFTC with the substitute mark. Goldstein was physically present in the PCM operations department when operations notified IFTC of the override.
48 Prior to March 1994, a portfolio manager on only rare occasions resorted to Bloomberg analytics to extrapolate a price for the security.
49 PCM was also calculating the NAV for all of its 38 funds, as the numerous closed-end funds administered by PCM were priced only on Thursdays.
50 Destro testified that she did not inform the Fund's board about the stale prices and could not recall hearing that anyone else informed the board.
51 Johnson requested and received from IFTC a one-hour extension of the 7:00 p.m. transfer agent deadline. This extension was an extraordinary accommodation because it delayed IFTC fromprocessing the day's transactions for all brokerages using IFTC as their transfer agent.
52 The law judge did not find any violations with respect to the March 31, 1994 NAV calculations. That finding has not been appealed.
53 Respondents dispute who approved the Fund's NAV for March 31. Although Goldstein was out of the office by the time that the Fund's NAV was finally calculated, the record indicates that she was in telephone contact with Johnson that evening.
Winson denies that she orally approved the final NAV. On March 31 Winson could not have provided written authoriza-tion for the final NAV because IFTC took its system off-line to process the day's transactions immediately after PCM reported the final number and PCM was unable at that time to print a final report. Therefore, a final March 31, 1994 NAV report was not generated until the next business day, April 4, 1994. Goldstein initialed the final report that morning.
54 Winson also requested March 31, 1994 prices from various non-Kidder traders for these securities in order to "after-the-fact cross-check" the fair market values that PCM had assigned to the securities on March 31, 1994. According to Winson, she purposely sent the list to non-Kidder traders because she wanted "new eyes from a different viewpoint who didn't typically lookat the bonds to try and put a valuation on the bonds." With few exceptions (and small variances in the amounts), the responses from other dealers confirmed the substantially reduced marks that PCM received for the securities on March 31.
55 Johnson, without identifying the "fund managers" by name, testified that "they really believed" that the marks they had received "were really low given where they thought the real value of these securities was, and it presented a problem for the fourth [of April]."
56 The record suggests that broker-dealers may have under-valued securities liquidated from the Askin funds in order to maximize their claims as creditors in Askin's bankruptcy proceedings. The record further suggests that broker-dealers provided one another with artificially low "accommodation bids" for Askin securities. Whether broker-dealers engaged in such activities, however, is not before us in this proceeding.
57 PCM served as a sub-adviser for the Manager's Fund, which held some of the same securities as PJIGX and for which Winson had primary portfolio manager authority.
58 The record is unclear about the source of the figures in the "New Price" and "Old Price" columns.
59 The law judge observed that Johnson "exhibited extraordinary recollection and attention to detail at the hearing, and her inability to recall the underlying meaning/purpose of such a suggestive piece of evidence as her handwritten notations" seemed "improbable."
60 The Division and PCM submitted separate written transcripts of these conversations. In some instances, the transcripts are inconsistent and the parties did not agree at the hearing to one set of written transcripts. Nonetheless, the parties submitted compact discs and the Division also submitted audio tapes containing these recorded conversations. For purposes of this opinion we have relied on the recordings rather than the parties' transcriptions.
61 The person at IFTC who is recorded on virtually all the conversations is Kelly Kovac.
62 A CUSIP - or Committee on Uniform Securities Identification Procedures - number is used by dealers and institutional investors to identify securities, including CMO derivatives.
63 Johnson left PCM's offices at approximately noon on April 4 to attend a professional seminar and did not return to PCM until April 6. During her absence, Johnson did not participate in the Fund valuation process.
64 The April 5 initial stratification report indicated that CUSIP 3133T4SJ6 had a reported price on April 4 of 10.9, but had dropped in value on April 5 to 10.06. Therefore, "putting back" this CMO's price to 10.9 increased its value to the prior reported level.
65 The law judge found that Kenny incorporated 43 of the 44 prices from Destro's list into the April 6 pricing transmission that Kenny forwarded to IFTC.
66 Although the transcript of this conversation does not include Destro, Kelly Kovac, the IFTC representative, testified at the hearing that she recognized Destro's voice and thought she heard it in the background of this recording.
67 The Order Instituting Proceedings alleged that manipulation of the Fund's NAV occurred during the period of March 31, 1994 through at least April 8, 1994. The law judge found that no manipulation occurred on March 31. After concluding that the Fund's NAV was fraudulently mispriced on April 4-6, 1994, the law judge "deem[ed] it unnecessary to evaluate [] Respondents' actions on April 7-8, 1994." The parties have not appealed the law judge's March 31 finding or his decision not to make findings with respect to the Respondents' pricing on April 7-8, 1994.
68 Nelson, Johnson, and Destro do not expressly concede that they misstated values or attempted to manipulate the Fund's NAV. However, each of them argues in general that misstatements in the value of securities in the Fund's portfolio did not result in a materially inaccurate NAV.
69 PCM's expert also confirmed that he had "no opinion of any kind" concerning the specific prices used by the Fund for CMOs during the period of March 31, 1994 through April 8, 1994, or the methods used by PCM to determine those prices.
70 Respondents PCM, Goldstein, Johnson, and Destro all cite an allegedly mispriced security as an example (CUSIP 3133T2FA3). On April 7 (a date not at issue in this appeal), Kidder marked the bond at 80 while First Boston Corporation marked the same bond at 67, "a difference of 20%." From this they conclude "that the Commission should find that the marks for CMOs vary by at least 20% in normal market conditions."
However, this is the only example on the Division's 18-page chart where two brokers provided different marks. Moreover, although PCM used the highest price (80) as the price of the bond on April 7, even though the midpoint between the two quotes was 73.5 and Kenny supplied a price of 74, Respondents provide no explanation for this choice.
71 Basic Inc. v. Levinson, 485 U.S. 224, 236, n. 14 (1988) (citation omitted). PCM also argues that the law judge, in contravention of Basic, impermissibly applied a bright-line standard that an artificially inflated NAV, regardless of any degree, is material. However, the law judge expressly rejected "a bright-line per share deviation (e.g., one percent/one penny) benchmark" for determining materiality. As discussed above, we do not apply a bright-line test here.
72 See Basic, 485 U.S. at 231-32 (an omitted fact is material if there is a substantial likelihood that its disclosure "would have been viewed by a reasonable investor as having significantly altered the 'total mix' of information made available") (quoting, TSC Indus., Inc., v. Northway, Inc., 426 U.S. 438, 449 (1976)).
73 For example, PCM made a number of price changes to IFTC's April4 initial report, but the file that PCM maintained to substantiate price changes does not evidence the basis for these changes. The record does not indicate that broker-dealer marks were unavailable on April 4, so it is at best questionable why PCM resorted to Bloomberg analytics for many of the changes. Of the Bloomberg printouts in the file, some do not provide any analytic basis for their indicated prices and others indicate on the face of the printouts that they were generated more than a month after April 4, 1994.
74 Johnson, Destro, and Nelson argue that the law judge found that they "purposefully conspired" to misrepresent and manipulate the Fund's NAV, but that the Division charged them as primary violators, not conspirators. Although the law judge used the word "conspiracy" in the Initial Decision (primarily in his initial summary of the case), the law judge did not apply the law of conspiracy to the evidence. The Order Instituting Proceedings charged these Respondents as primary violators who "engaged in a scheme" to override dealer quotations and gradually lower or "rachet down" prices of derivatives in the Fund over the course of several days. As the United States Court of Appeals for the Second Circuit held, "[p]rimary liability may be imposed 'not only on persons who made fraudulent misrepresentations, but also on those who had knowledge of the fraud and assisted in its perpetration.'" SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1471 (2d Cir. 1996)(quoting Azrielli v. Cohen Law Offices, 21 F.3d 512, 517 (2d Cir. 1994)). A respondent may not escape primary liability by claiming that he or she was simply following another's orders. SEC v. U.S. Envtl., Inc., 155 F.3d 107 (2d Cir. 1998).
75 Johnson raises arguments virtually identical to the arguments raised by the other individual Respondents. We do not separately address her arguments and resolve them consistent with our resolution of the other Respondents' assertions.
76 For the most part, the law judge did not specifically identify which Respondent explanations he found implausible. Rather, he made this determination after weighing the various claims among the parties. Cf. supra note 59.
77 In particular, the law judge identified changes to certain securities just prior to or immediately after the reporting of the Fund's NAV to Nasdaq where "the sole identifiable purpose of each of these price changes was simply to boost the April 5th and April 6th NAVs from the indicated $10.09 per share to the preferred $10.10 per share."
78 Following IFTC's disclosure that the price increase to CUSIP 3133T4SJ6 raised the Fund's NAV, Goldstein described that security as one of "our favorite securities of all time."
79 See supra page 28.
80 Winson also testified that Nelson was aware of the smoothing procedure adopted on April 4. Winson stated that Goldstein and Nelson instructed her to smooth prices when Winson questioned them about the propriety of doing so.
Nelson's only response to Winson's direct testimony on this issue was an implicit attack on Winson's credibility. Specifically, Nelson noted in his brief that Winson identified his voice in the background on one of the recorded conversations from the afternoon April 6, 1994, at a time when Nelson was out of the office attending a meeting in New York.
81 The Division asserts in addition that Nelson's instruction related to the "New Prices" that the Fund received on the morning of April 4, 1994 to substantiate its March 31, 1994 NAV calculation - not to current prices for April 4, 1994. Thus, Nelson's instruction to take the "full hit" would not have resulted in a correct NAV since the prices to which he referred were not current.
82 As for the Pricing Sheet, Nelson argues that there is no evidence in the record establishing that he knew of the existence of the Pricing Sheet on April 4, 1994 or that he ever saw the Pricing Sheet. Johnson, however, testified that Nelson specifically referred to the "new price column" during the "full hit" conversation among herself, Destro, and Nelson. Moreover, Destro, Johnson, and Winson all testified that they and Nelson discussed "smoothing" the prices reflected in the Pricing Sheet.
83 Nelson asserts that "almost certainly" his writing on the Pricing Stratification report was part of a review of the Fund's pricing procedures conducted by its auditor in May 1994. Nelson does not address why, a month after the events at issue, he would have memorialized on the initial Pricing Stratification report the April 4 price changes to securi-ties in the Fund or why such memorializations were not made to the final report on that date.
84 However, we agree with Nelson that there is insufficient evidence that he had any involvement with the Fund's pricing on April 5, 1994. Destro testified to the effect that she was "completely responsible" for the operations aspects of the Fund's pricing on that day. While Nelson was in the office on the morning of April 6, it is undisputed that he left the office at approximately noon to attend a conference out of state and did not return to PCM's offices until sometime in the afternoon of April 8.
85 Goldstein testified that Johnson requested the Bloomberg screen in order to have some documentation on file.
86 In this regard, notes maintained by a Commission staff examiner of telephonic interviews with Nelson indicate that Nelson, in November 1994, conceded to the examiner that he, Goldstein, and Winson had "tried to do their best" in March and April 1994 to obtain market maker valuations, but that a number of prices used were internal "fair values." These notes further corroborate Nelson's involvement in mispricing the Fund's securities and his knowledge that PCM was not using market prices to calculate theFund's NAV.
87 Having considered Nelson's arguments and the evidence, the law judge found that the "Respondents' [including Nelson] explanations of what took place on April 4, 1994 simply are not plausible."
88 Johnson asserts that she should not be found liable for any books and records violations based upon a failure to maintain complete pricing files because she delegated "these record-keeping functions to her staff." Here, the incomplete files at issue relate to Fund pricing operations that she personally performed. We find her delegation claim to be without merit.
89 17 C.F.R. § 270.22c-1(b) ("The current net asset value of anysuch security shall be computed no less frequently than once daily, Monday through Friday....").
90 We also note that PCM's closed-end funds were priced only on Thursdays. Thus, while Kidder personnel testified about Thursday pricings, it is understandable that Kidder would provide the bulk of its marks to Kenny and PCM on Thursdays.
91 We agree with the Division's observation that "the Commission cannot allow a mutual fund adviser to hide behind a contract with a pricing service while knowingly or recklessly calculating an NAV with securities prices that it knows to be stale," as evidenced by our holding in Section V. Here, we find only that the record does not support the allegation that PCM had scienter with respect to the statement in the prospectus that the Fund's securities were priced on a daily basis.
92 All Respondents argue that, because the evidence does not support a finding of violation, no sanctions are appropriate. For the reasons set forth above, we have found that Respondents committed securities law violations.
93 See, e.g., Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 185-86 (1973) (where Congress has entrusted an administrative agency with responsibility of selecting means of achieving statutory policy, choice of sanction is not to be overturned unless it is unwarranted in law or without justification in fact); Valicenti Advisory Servs., Inc. v. SEC, 198 F.3d 62, 66 (2d Cir. 1999) (SEC's imposition of sanctions is reviewed for an abuse of discretion).
94 See supra note 7 and accompanying text. PCM has not appealed the revocation of its registration, but rather, states that the "unchallenged administrative sanction to revoke PCM's registration ensures that PCM will not have any future conduct."
95 15 U.S.C. §§ 78u-2(c), 80a-9(d)(3), 80b-3(i)(3). See, e.g., New Allied Dev. Corp., 52 S.E.C. 1119, 1130, n.33 (1996).
96 PCM contends that of the "total losses" that investors sustained, most recovered between one-half and two-thirds of their losses through a class action settlement. PCM states,however, that it is "axiomatic that investors in the Fund were prepared to accept certain risks when they invested" and that "no investor can reasonably expect PCM to make restitution for losses that resulted from accepted risks." Thus, PCM asserts that the shareholders received "full restitution" after factoring in these "accepted risks."
97 For the 50 or so shareholders who opted out of this settlement, PCM notes that it settled with them and paid $18.1 million. Of the three shareholders who elected to arbitrate their claims, PCM asserts that only one shareholder received more through arbitration than it would have received under the class action settlement.
98 PCM settled with the States of Maryland, Minnesota, Montana, North Dakota, and South Dakota.
99 Moreover, William J. Brody, a lawyer whose firm, Frederickson & Byron, had invested in the Fund and arbitrated its claim following the Fund's losses, testified that, following an award to the law firm in excess of $2.5 million in compensatory damages, punitive damages, and fees, PCM appealed the award three times before finally reimbursing the law firm for its losses.
100 Piper Jaffray, Inc. and Piper Capital Management, Inc., ConsentOrder SE9404156/TMF (Minn. Comm'r of Commerce Mar. 3, 1996); Notice of Acceptance of Acceptance, Waiver and Consent, Comp. No. C04960008 (NASD Mar. 4, 1996).
101 PCM also asserts that its conduct was not egregious because the mispricing of the Fund occurred "on only three of the six days challenged by the Division," and that "the magni-tude of that mispricing is, at most, a few cents per share." For the reasons discussed above, we do not find this asser-tion mitigating. We agree with the law judge that PCM used prices for certain CMOs that "had no legitimate basis whatsoever."
102 See 15 U.S.C. §§ 78u(d)(3)(B)(iii), 80a-9(d)(2)(C), 80b-3(i)(2)(C). According to PCM, absent a finding of addi-tional violations, the law does not permit any increase in the monetary penalty already imposed and there is no basis for the Division's demand that the penalty be increased.
103 PCM also argues that proceedings involving "sufficiently similar facts and allegations" in which the Commission settled for lower awards should serve as a guide for the appropriate level of sanctions here. However, "it is well established that respondents who offer to settle may properly receive lesser sanctions than they otherwise might have received based on 'pragmatic considerations such as the avoidance of time-and-manpower-consuming adversary proceedings'." David A. Gingras, 50 S.E.C. 1286, 1294 (1992) (quoting Nassar & Co., 47S.E.C. 20, 26 (1978)).
PCM also cites one case, Abraham and Sons Cap., Inc., I.D. Rel. No. 135 (Jan. 28, 1999), 68 SEC Docket 3525, in which a law judge imposed a third tier sanction but at less than the maximum amount. However, as the Supreme Court has made clear, a sanction imposed in one case is not invalid because it is in excess of sanctions imposed in other cases. See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973).
104 See 15 U.S.C. §§ 78u-2(c)(3), 80a-9(d)(3), 80b-3(i)(3) ("In considering under this section whether a penalty is in the public interest, the Commission may consider ... the need to deter such person and other persons from committing such acts or omissions....").
105 A PCM employee testified at the hearing that the reserve was taken against various outstanding litigation matters, including this proceeding.
106 The Division believes that the law judge improperly used the state regulatory penalties paid by PCM as a ceiling or cap on the amount of penalties assessed in this proceeding, and argues that the civil money penalty fails as a deterrent and does not serve the public interest. We do not believe, as the Division suggests, that the law judge "improperly linked" PCM's penalty to the fines already assessed by state regulators. We wish to make clear that settlements with other regulators do not serve to limit the amount of civil money penalties that may be assessed in any Commission action.
107 See supra notes 7 and 94.
108 603 F.2d 1126, 1140 (5th Cir. 1979) (imposition of sanctions in the public interest determined by weighing the egregiousness of the respondent's actions, the isolated or recurrent nature of the infraction, the degree of scienter, the sincerity of the respondent's assurances against future misconduct, the respondent's recognition of the wrongful nature of the conduct, and the likelihood that the respondent's occupation will present opportunities for future violations), aff'd, 450 U.S. 91 (1981).
109 KPMG Peat Marwick LLP, Exchange Act Rel. No. 43862 (Jan. 19,2001), 74 SEC Docket 384, 429 (in assessing risk of future violations, though "some" risk is necessary, it need not be very great to warrant issuing a cease-and-desist order and, absent evidence to the contrary, a finding of violation raises a sufficient risk of future violation), petition denied, 289 F.3d 109 (D.C. Cir. 2002). See also Herbert Moskowitz, Exchange Act Rel. No. 45609 (Mar. 21, 2002), 77 SEC Docket 481, 496-97 (same).
110 While the individual Respondents place great weight on the law judge's conclusion that their conduct was not egregious in light of the totality of the circumstances, they ignore that the law judge found that PCM's conduct was egregious. The violations that were attributable to PCM were caused by, and the responsibility of, all of the individual Respondents.
111 See, e.g., KPMG, 74 SEC Docket at 429.
112 We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.