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U.S. Securities and Exchange Commission

SEC Revokes Registration of Republic New York Securities Corp., a Broker-Dealer Pleading Guilty to Securities Fraud in Related Criminal Action

FOR IMMEDIATE RELEASE
2001-148

Washington, DC, December 17, 2001 — The Securities and Exchange Commission announced today that it has issued an order revoking the registration of Republic New York Securities Corp., a New York-based broker-dealer registered with the Commission since 1992. Republic Securities is now a subsidiary of HSBC USA, formerly Republic New York Corporation.

The Commission found that Republic Securities violated federal securities laws by participating in a massive Ponzi scheme operated by Martin Armstrong. In September 1999, the Commission charged Armstrong and two companies he controlled, Princeton Economics International and Princeton Global Management, in an emergency action alleging that they defrauded scores of Japanese companies that had invested billions of dollars in Princeton Global Management notes. Armstrong, who was indicted by a federal grand jury in New York, was also charged by the Commodity Futures Trading Commission.

In the parallel criminal proceeding, the Office of the United States Attorney for the Southern District of New York today announced a guilty plea by Republic Securities. As part of the resolution of the criminal case, Republic Securities has agreed to pay $606 million in restitution to defrauded investors. The Commodity Futures Trading Commission also announced a related enforcement action against Republic Securities today. In settling the Commission's enforcement action, Republic Securities neither admitted nor denied the Commission's findings.

The Commission found that from 1995 through 1999 Republic Securities engaged in a fraudulent scheme involving hundreds of accounts opened by Armstrong at Republic Securities for investors' funds. As set forth in the Order, which is available on the Commission's website, the Commission found:

  • The Princeton Global Management notes were marketed in Japan as safe investments, handled by a successful commodities trader. According to sales materials provided to investors, their funds would be secure in segregated accounts maintained at a broker-dealer affiliated with a prominent, well-capitalized bank, then known as Republic National Bank.
     
  • In truth, Armstrong was far from successful, losing over a half-billion dollars of investors' funds in risky commodities trading. Despite his poor performance, Armstrong paid himself huge management and performance fees, buying valuable gold treasures and a broker-dealer in Tokyo with investors' funds.
     
  • Republic Securities, acting by and through its President, and the President of its Futures Division, was an active participant in Armstrong's fraudulent scheme. Specifically, Republic Securities:
     
    • Provided Armstrong with over 200 letters, the majority of which materially overstated the Net Asset Value of account balances relating to investors' funds;
       
    • Entered into "fiduciary agreements" with issuers of the Princeton Global Management notes which were used by Armstrong to assure investors that Republic Securities and Republic National Bank were safeguarding investors' funds;
       
    • Persuaded Armstrong to use accounts holding investors' funds as collateral for the huge negative balances in his trading accounts, and then to transfer cash balances to the trading accounts, thereby commingling investors' funds; and
       
    • Provided Armstrong with false and misleading letters to Armstrong that he used to conceal the fraud from the Japanese Financial Supervisory Agency, which was investigating the notes in Japan.
       
  • By these fraudulent acts, Republic Securities directly committed securities fraud, in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5.

The Commission revoked the firm's registration as a broker-dealer. In recognition of the restitution paid by the firm in the criminal case, which far exceeded the firm's profits from its handling of Armstrong's account, and the firm's cooperation with the Commission's investigation, the Commission did not seek or obtain monetary sanctions from the firm. Separately, the Commission issued a temporary order exempting Republic Securities' new parent, HSBC, as well as HSBC Asset Management from the provisions of Section 9(a) of the Investment Company Act.

Wayne M. Carlin, Regional Director of the Commission's Northeast Regional Office, pointed to the significant contributions of the U.S. Attorney's Office for the Southern District of New York, the Commodity Futures Trading Commission, the Federal Bureau of Investigation, the Federal Reserve Bank of New York and the Japanese Financial Services Agency ("FSA") in the coordinated investigations that preceded today's announcement. "From the moment we learned that the FSA had questioned NAV letters from Republic Securities, we joined our fellow regulators to get to the bottom of the problem. With the FSA's assistance, we were able to overcome language and other barriers, and work speedily with the CFTC to freeze existing funds at Republic Securities. It is truly gratifying to join with the U.S. Attorney's Office and the CFTC in announcing this resolution. The public interest is obviously served when the victims of criminal conduct are compensated, without the drain of expensive litigation. Moreover, the historic size of the restitution order stands as a warning to regulated entities of the consequences that can ensue if they permit their facilities to be misused in aid of wrongdoing."

For further information, please contact:

Wayne M. Carlin
Regional Director
Northeast Regional Office
646-428-1510

Dorothy Heyl
Senior Trial Counsel
Northeast Regional Office
646-428-1758

*   Additional materials: Release No. 34-45157

 

http://www.sec.gov/news/headlines/revokernysc.htm


Modified: 12/17/2001