For Immediate Release 99-112 Fleet Investment Advisors to Pay $1.9 Million as a Result of Former Shawmut Officers' Fraudulent Use of Client Brokerage Commissions Boston, MA, September 9, 1999 -- In three related enforcement actions, the Securities and Exchange Commission today brought fraud charges against Fleet Investment Advisors Inc. ("Fleet"), eight individuals, including Michael J. Rothmeier, the former president of Shawmut Investment Advisers, Inc. ("Shawmut") and a Michigan brokerage firm in connection with Shawmut's fraudulent use of $1.8 million of its advisory clients' brokerage commissions to pay for client referrals. Fleet acquired Shawmut in December 1995, and is liable as Shawmut's successor. Without admitting or denying the charges, Fleet and two of the respondents are settling with the Commission, while Rothmeier and the six remaining respondents are contesting the charges. According to the Commission, beginning in mid-1993, Rothmeier and other former Shawmut officers directed client brokerage transactions as compensation to brokers who referred new client accounts to Shawmut. However, Shawmut's disclosure document, Form ADV, stated that it directed client brokerage based on investment research that brokers provided. As a result, Shawmut's Form ADV was false and misleading because it failed to disclose that Shawmut used its clients' brokerage commissions to obtain referrals, a benefit for itself. The federal securities laws preclude advisors from any undisclosed use of client assets to benefit themselves. In addition, Form ADV specifically requires advisers to disclose the factors they use in selecting brokers, and to describe any arrangement to compensate a person for referrals. The Commission found that Shawmut breached its fiduciary duty to its clients by failing to disclose the use of client brokerage commissions to obtain referrals. Rothmeier, who knew about and approved of the referral arrangements, is charged with failing to disclose the use of client brokerage commissions to obtain referrals in Shawmut's Form ADV, which he reviewed and signed as true and complete. Juan Marcel Marcelino, District Administrator of the Commission's Boston District Office said, "Full and fair disclosure to investors is the foundation of the federal securities laws. Advisers must disclose any and all arrangements regarding their use of clients' commissions." The Commission alleges that between mid-1993 and March 1996, Rothmeier, former vice president of sales, Clarke T. Blizzard, and two former chief investment officers, Rudolph Abel and Donald C. Berry, caused the direction of more than $1.8 million in brokerage commissions to thirteen brokerage firms as compensation for referring clients. Approximately $1 million of the $1.8 million in commissions was directed to East West Institutional Services, Inc. ("East West"), a Michigan brokerage firm, as a result of a referral agreement between Blizzard and Christopher P. Roach, East West's only registered representative. Specifically, the Commission alleges that Blizzard and Roach had an agreement that Shawmut would direct $1,000 of brokerage commissions for every $1 million of client assets that Roach steered to Shawmut. In accordance with the agreement, Roach referred a $600 million International Brotherhood of Teamsters Local Union 710 pension fund account to Shawmut. The Commission contends that Roach and Blizzard agreed to conceal their agreement from the union. In addition, the Commission alleges that Craig Janutol, East West's president, failed to properly supervise Roach. The Commission also found that Shawmut breached its fiduciary duty to seek the best execution of its clients' securities transactions. On several occasions, in order to fulfill commitments to East West, two Shawmut traders, Karen Michalski and Christopher D. Sargent, awarded securities transactions to a broker-dealer when it did not have the best available price. Michalski and Sargent altered trade tickets by either covering with white-out or crossing out the more favorable bids or offers to make it appear that East West's correspondent firm had the best price, when it did not. Accordingly, on those transactions, Shawmut failed to seek the best price available, costing its clients more than $63,000. Settled and Contested Enforcement Actions: 1. Fleet Settles the Charges: The Commission charged Fleet, as successor to Shawmut, with violating the anti-fraud, reporting and books and records provisions of the Investment Advisers Act of 1940. A portion of the commissions that Shawmut directed to brokers on the basis of referrals resulted from transactions on behalf of a registered investment company with which Shawmut was affiliated. Therefore, the Commission also charged Fleet with a violation of Section 17(e)(1) of the Investment Company Act of 1940, a provision concerning compensation of affiliated persons of an investment company. Without admitting or denying the Commission's findings, Fleet agreed to cease and desist from violating the federal securities laws and to pay more than $1.9 million to clients whose accounts were used to pay brokers for client referrals. 2. Michalski and Sargent Settle the Charges: Michalski and Sargent, without admitting or denying the findings, agreed to (1) cease and desist from committing or causing antifraud violations and books and records violations of the Advisers Act; (2) pay a $5,000 civil monetary penalty; and (3) be barred from association with an investment adviser with a right to reapply after 15 months. 3. Remaining Respondents Contest the Charges: The Commission charged the remaining respondents in an action to be tried before an administrative law judge. The SEC charged Rothmeier with causing and aiding and abetting violations of the antifraud and books and records provisions of the Investment Advisers Act and directly violating the reporting provisions of the Act. Blizzard, Abel, Berry, Roach and East West are charged with causing and aiding and abetting violations of the antifraud provisions of the Advisers Act, and Janutol with failing to properly supervise Roach. The Commission is seeking an order: (1) requiring Rothmeier, Blizzard, Abel, Berry, Roach and East West to cease and desist from committing securities laws violations; (2) imposing remedial sanctions and civil money penalties against all of the parties; (3) requiring Blizzard to disgorge his ill-gotten gains from approximately $3.3 million in sales commissions he received as a result of his illegal acts, plus prejudgment interest; and (4) requiring Roach to disgorge brokerage commissions from Shawmut's clients' transactions, plus prejudgment interest. (For details on these actions, refer to Investment Advisers Act Releases No. 1821 and 1822, and Administrative Proceeding No. 3-10007.) The Commission acknowledges and appreciates the cooperation of Fleet in bringing this case to the Commission's attention and to fruition. For further information contact: Juan Marcel Marcelino (617) 424-5934 James B. Adelman (617) 424-5927 # # #