SEC SANCTIONS INVESTMENT ADVISER, BROKER-DEALER, CHIEF EXECUTIVE OFFICER AND PRESIDENT/COMPLIANCE OFFICER FOR VIOLATIONS RELATING TO PROHIBITED TRANSACTIONS

[15363] November 18, 2002 TO: COMPLIANCE ADVISORY COMMITTEE No. 100-02 INVESTMENT ADVISER ASSOCIATE MEMBERS No. 31-02 INVESTMENT ADVISER MEMBERS No. 49-02 SEC RULES MEMBERS No. 101-02 RE: SEC SANCTIONS INVESTMENT ADVISER, BROKER-DEALER, CHIEF EXECUTIVE OFFICER AND PRESIDENT/COMPLIANCE OFFICER FOR VIOLATIONS RELATING TO PROHIBITED TRANSACTIONS The Securities and Exchange Commission recently accepted offers of settlement and imposed sanctions in an administrative proceeding against an investment adviser, its affiliated broker-dealer, the chief executive officer of the adviser and broker-dealer, and the president and compliance officer of the adviser for engaging in violations relating to prohibited transactions.1 Each of these parties consented to the entry of the order, which is summarized below, without admitting or denying the Commission’s findings. Cross Trades. The order states that, between 1997 and 1999, the chief executive officer, acting as the adviser’s portfolio manager, effected cross trades on a principal basis between an investment company advised by the adviser and accounts in which he had an ownership interest in violation of Sections 17(a)(1) and 17(a)(2) of the Investment Company Act.2 Principal Transactions. The chief executive officer also effected principal transactions between client portfolios in which he did not have an ownership interest and accounts in which he held a substantial ownership stake, including the fund.3 The order notes that the adviser neither gave advance notice to nor obtained consent from the clients for any of these transactions. The order indicates that certain of these trades were effected in order to conceal from the client the presence in the client’s portfolio of certain securities. According to the order, the stocks were sold so that they would not be listed as holdings in the quarterly reports sent to the client; the stock was sold back into the client’s account a few days later. 1 In the Matter of Gintel Asset Management, Inc., Gintel & Co. LLC, Robert M. Gintel and Stephen G. Stavrides., SEC Release No. IA-2079 (November 8, 2002). A copy of the order is available on the Commission’s website at www.sec.gov/litigation/admin/ia-2079.htm. 2 The broker-dealer served as underwriter to the investment company. 3 The chief executive officer owned 34% of the fund. 2 Personal Trading. The order states that the chief executive officer violated the code of ethics adopted by the fund, the adviser, and the broker-dealer by repeatedly effecting personal transactions during blackout periods imposed by the code. The compliance officer, who was responsible for monitoring employee trading and determining appropriate sanctions for violations of the code of ethics, failed to apply the blackout periods for personal trading to the chief executive officer. Misuse of Material, Non-Public Information. The order indicates that the chief executive officer purchased shares of a thinly traded stock for two client accounts and the broker-dealer’s trading account shortly before the adviser’s sale of a large block of that stock from client accounts became public. According to the order, this trading before the adviser’s block sale demonstrated that the adviser and broker-dealer did not have adequate procedures to prevent the misuse of material, non-public information. False Statements. According to the order, the principal transactions and the failure to apply the provisions of the code of ethics to the chief executive officer caused the adviser to make false statements in its Form ADV, which stated that the adviser did not engage in principal transactions and that all employees followed the code of ethics. The order also states that the affiliated transactions involved in the cross trades caused the fund to make false statements in its Forms N-SAR, which stated that the fund did not engage in affiliated transactions. The compliance officer prepared and filed all of these forms. Based upon this conduct, the Commission found that: • The adviser, broker-dealer and chief executive officer willfully violated Sections 17(a)(1) and 17(a)(2) of the Investment Company Act by engaging in the cross trades described above. • The adviser willfully violated Sections 206(1) and 206(2) of the Advisers Act and the chief executive officer willfully aided and abetted and caused these violations by effecting principal transactions to conceal information from a client. The adviser also willfully violated Section 206(3) of the Advisers Act and the chief executive officer willfully aided and abetted and caused these violations by failing to give advance notice to or obtain consent from the clients for any of these principal transactions. • The adviser willfully violated Section 17(j) of the Investment Company Act and Rule 17j- 1(b)(1) thereunder and the chief executive officer and the compliance officer willfully aided and abetted and caused these violations by failing to use reasonable diligence, and institute procedures reasonably necessary, to prevent violations of the code of ethics. • The adviser willfully violated Section 204A of the Advisers Act, the broker-dealer willfully violated Section 15(f) of the Securities Exchange Act and the chief executive officer willfully aided and abetted and caused these violations by failing to establish, maintain and enforce procedures reasonably designed to ensure that material, non- public information was not misused. • The adviser willfully violated Sections 206(2) and 207 of the Advisers Act by making false statements in its Form ADV. The compliance officer willfully aided and abetted 3 and caused the violations of Section 206(2) and willfully violated Section 207 with respect to these statements. The compliance officer also willfully violated Section 34(b) of the Investment Company Act because of the false statements in the Forms N-SAR. Based upon these findings, the Commission imposed the following sanctions: • Each of the parties was censured and ordered to pay a civil penalty in the following amounts: adviser--$100,000, broker-dealer--$75,000, chief executive officer--$75,000, and compliance officer--$25,000. The chief executive officer was also ordered to pay disgorgement to clients and prejudgment interest in the amount of $658,858.91. • The adviser was prohibited from soliciting or accepting new advisory clients for one year after entry of the order. The adviser and broker-dealer were required to provide a copy of the order to all current clients. The broker-dealer was also required to provide a copy of the order to all prospective clients for one year from the date of the order and, after the expiration of this one year period, the adviser was required to provide a copy of the order to all prospective clients for one year thereafter. • The adviser and the broker-dealer were required to retain an independent consultant to review their compliance procedures, and various obligations were imposed on the adviser and broker-dealer in connection with their relationship and dealings with the consultant. • Each of the parties in their offers of settlement also agreed to cease and desist from committing or causing any violations or future violations of the Investment Company Act, the Advisers Act and the Securities Exchange Act. Anu Dubey Assistant Counsel