SECURITIES EXCHANGE ACT OF 1934
Rel. No. 46439 / August 30, 2002
Admin. Proc. File No. 3-9440
In the Matter of DAVID E. LYNCH
|
: |
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that David E. Lynch cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 15(c), and 17(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5, 15c3-1, 17a-3, 17a-5, and 17a-11; and it is further
ORDERED that David E. Lynch be, and he hereby is, barred from association with any broker or dealer; and it is further
ORDERED that David E. Lynch pay a civil money penalty in the amount of $100,000.
Payment of the civil penalty shall be made within 21 days of the issuance of this order. The civil penalty shall be (a) made by United States postal money order, certified check, bank cashier's check, or bank money order; (b) made payable to the Securities and Exchange Commission; (c) mailed or delivered by hand to the Comptroller, 6432 General Green Way, Alexandria, VA 22312; and (d) submitted under cover letter that identifies the particular respondent in these proceedings, as well as the Commission's administrative proceeding file number. A copy of this cover letter and money order or check shall be sent to Teresa J. Verges, Southeast Regional Office, Securities and Exchange Commission, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 Section 17(a) of the Securities Act makes it unlawful for any person to:
"(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. use or employ, in connection with the purchase or sale of any security.
15 U.S.C. § 77q(a).
2 Section 10(b) of the Exchange Act makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of" the Commission's rules. 15 U.S.C. § 78j(b).
3 Among other things, Exchange Act Section 15(c) makes it illegal for a broker or dealer to effect any transactions ina security in contravention of the Commission's rules with respect to financial responsibility. 15 U.S.C. § 78o(c).
4 Exchange Act Section 17(a) requires every registered broker or dealer to keep certain records and file certain reports. 15 U.S.C. § 78q(a).
5 Rule 10b-5 makes it unlawful for any person to "employ any device, scheme, or artifice to defraud" or to "engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5.
6 Exchange Act Rule 15c3-1 specifies the net capital requirements for brokers and dealers. 17 C.F.R. § 240.15c3-1.
7 Exchange Act Rule 17a-3 requires brokers and dealers to create and maintain certain records, including brokerage orders and memoranda of the firm's trading activity. 17 C.F.R. § 240.17a-3.
8 As relevant here, Securities Exchange Act Rule 17a-5 requires every broker-dealer that neither clears transactions nor carries customer accounts to file FOCUS Reports with the National Association of Securities Dealers ("NASD") within specified time periods. 17 C.F.R. § 240.17a-5.
9 Exchange Act Rule 17a-11 provides that every broker or dealer whose net capital falls below the required minimum must give notice of such deficiency that same day to the Commission. The rule also provides that a broker or dealer that fails to make or keep current the books and records required by Rule 17a-3 must give notice to the Commission of this fact on the same day. Further, the broker or dealer must transmit a report to the Commission within 48 hours of the notice stating what it has done or is doing to correct the situation. 17 C.F.R. § 240.17a-11(b) and (d).
10 Notice of the Division's proposed exhibits was provided to Lynch on April 10, 1998.
11 17 C.F.R. § 201.155(a).
12 Under Rule 155(a), the allegations of the OIP may be deemed to be true.
Rule 155(a) does not limit the fact-finder in a default proceeding to only the specific allegations contained in the OIP. Rule 155(a) states that "the Commission or the hearing officer may determine the proceeding against [the defaulting] party upon consideration of the record, including the order instituting proceedings, the allegations of which may be deemed to be true . . . ." Thus, if additional evidence is adduced in a proceeding against a respondent, the decisionmaker properly should consider that evidence in the determination of the proceeding.
13 A riskless principal transaction occurs when a dealer receives from its customer an order to purchase (or sell) asecurity and purchases (or sells) that security to another person in a transaction that is proximate in time and designed to offset the customer's order. Strategic Resource Management, Inc., 52 S.E.C. 542, 544 n.8 (1995).
14 In a parking scheme, a person "sells" securities to a purchaser subject to an agreement or understanding that the seller will repurchase the securities at a later time at a price that leaves the economic risk with the seller. A parking scheme often involves an attempt to reduce the apparent amount of securities owned by the seller. Yoshikawa v. SEC, 192 F.3d 1209, 1212 (9th Cir. 1999); Securities Investor Protection Corp. v. Vigman, 74 F.3d 932, 933 n.3 (9th Cir. 1996).
15 First Montauk calculated its net capital position on a settlement date basis at the end of each month.
The following table summarizes First Montauk's undisclosed net capital deficiencies as a result of Lynch's parking scheme:
| Date | Reported Excess Net Capital Per the Broker-Dealer |
Adjusted Excess/(Deficit) Net Capital Per SEC |
| April 1993 | $ 533,000 | $ (77,735) |
| May 1993 | $ 818,000 | $ 627,250 |
| June 1993 | $ 874,000 | $ 431,646 |
| July 1993 | $ 677,000 | $ 416,430 |
| August 1993 | $ 791,000 | $ (49,484) |
| September 1993 | $ 758,000 | $ 465,873 |
| October 1993 | $ 627,000 | $ (65,730) |
| November 1993 | $ 538,000 | $ (1,249,532) |
| December 1993 | $ 557,000 | $ (69,834) |
| January 1994 | $ 634,000 | $ 11,269 |
| February 1994 | $ 1,075,000 | $ 477,160 |
| March 1994 | $ 1,035,000 | $ 348,270 |
16 The Division charged that the amount of the excessive markups was more than $1.85 million. Because Lynch defaulted, he has not contested the Division's calculation.
17 Mayer A. Amsel, 52 S.E.C. 761, 768 (1996).
18 See, e.g., Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981).
19 15 U.S.C. § 78u-2. Exchange Act Section 21B(c) directs the Commission to consider the following factors in considering whether a penalty is in the public interest:
(1) whether the act or omission for which such penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement;
(2) the harm to other persons resulting either directly or indirectly from such act or omission;
(3) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior;
(4) whether such person previously has been found by the Commission, another appropriate regulatory agency, or a self-regulatory organization to have violated the Federal securities laws, State securities laws, or the rules of a self-regulatory organization, has been enjoined by a court of competent jurisdiction from violations of such laws or rules, or has been convicted by a court of competent jurisdiction of violations of such laws or of any felony or misdemeanor described in 15 U.S.C. § 78o(b)(4)(B);
(5) the need to deter such person and other persons from committing such acts or omissions; and
(6) such other matters as justice may require.
15 U.S.C. § 78u-2(c).
20 15 U.S.C. § 78u-2(b).
21 15 U.S.C. § 78u-2(b)(1).
22 15 U.S.C. § 78u-2(b)(2).
23 15 U.S.C. § 78u-2(b)(3).
24 See text accompanying n.17 supra.
25 Even if we did not consider Lynch's gains on these transactions, a third-tier penalty is warranted since Section 21B(b)(3)(B) permits a third-tier penalty if Lynch's conduct resulted in a substantial loss to other persons. The substantial loss to others is established by the allegation in the OIP of excessive markups, which we deem to be true under Rule of Practice 155(a).
26 We have considered all of the contentions advanced by the Division. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.