UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 40891 / January 7, 1999 ADMINISTRATIVE PROCEEDING File No. 3-9402 : ORDER MAKING FINDINGS In the Matter of : AND IMPOSING REMEDIAL : SANCTIONS AGAINST EURO-ATLANTIC SECURITIES, INC., : JOHN T. MADDEN BRIAN A. SCHMIDT, : DARLAN E. GORDON, : JOHN T. MADDEN, : WILLIAM AVENT, and : JOHN ARISTOTLE DILWORTH : : Respondents. : : : I. The Securities and Exchange Commission ("Commission") instituted public administrative proceedings pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent John T. Madden ("Madden") on September 10, 1997. II. Respondent Madden has submitted an Offer of Settlement to the Commission, which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the jurisdiction of the Commission over Respondent Madden and over the subject matter of these proceedings and as to Section III., paragraph 1., below, which are admitted, Respondent Madden consents to the entry of findings and remedial sanctions set forth below. III. On the basis of this Order and the Offer of Settlement, the Commission finds that:[1] The Fraudulent T-Bill Scheme by a Euro-Atlantic Registered Representative 1. At all relevant times, Respondent Madden was the branch office manager of, and a registered representative with, the Chicago branch office of Euro-Atlantic Securities, Inc. ("Euro-Atlantic"), a broker-dealer registered with the Commission. 2. From July to about October 1995, a registered representative in the Chicago branch office ("Registered Representative") and others perpetrated a scheme whereby they defrauded an investor ("Investor") of $300,000 in connection with the purported "leasing" of U.S. Treasury Bills ("T-Bills"). The Investor was a businessman from the British Virgin Islands, who was badly in need of financing for his business. Upon learning of the Investor’s predicament, the Registered Representative began to lay the foundation of the convoluted scheme to defraud him. The Registered Representative told the Investor that he could arrange for the Investor to "lease" or borrow T-Bills, but that the minimum amount available was $10 million at a cost of $300,000 per month. Although this was more than the Investor had intended to borrow, the Registered Representative explained that if the Investor leased the full $10 million and followed his advice, the leased T-Bills would actually pay for themselves. 3. Under the Registered Representative’s scheme, the leased T-Bills were to be used as collateral for a margin account to be opened in the Investor’s name at another broker-dealer. Using the margin account, the Registered Representative explained that the Investor could obtain $2 million for his business and invest the remaining $8 million in a "high yield" trading program at the other broker-dealer. According to the Registered Representative, this trading program would generate sufficient returns to pay the cost ($300,000 per month) of borrowing the T- Bills. The Registered Representative told the Investor that he had a supplier ("Supplier"), who had been assigned $10 million in T-Bills, which he had available for lease. 4. The Registered Representative put the Investor in contact with the purported Supplier of the T-Bills, who confirmed the Registered Representative’s plan. The Registered Representative handled all of the negotiations regarding costs and fees and some of the paperwork for the Investor to open a margin account at the other broker-dealer. The Registered Representative was to receive $25,000 for arranging the T-Bill lease and commissions on trades in the Investor’s margin account. 5. The Registered Representative pressured the Investor to proceed with the deal, urging him not to delay and to trust him because "this [was] a good deal." The Investor, however, wanted more information about the trading program because, without the promise of substantial returns, the Investor could not afford the monthly lease payments. In response, the Registered Representative sent the Investor two fabricated letters supposedly from the other brokerage firm that would run the trading program. The letters, which were signed by another registered representative purportedly associated with the other firm, assured the Investor that he could margin the T-Bills and trade the proceeds in a program with a weekly yield of at least 3%. All along, the Investor was led to believe that the other registered representative was associated with the other brokerage firm. However, the letters supposedly from the other broker- dealer were provided to the Investor after the other registered representative was no longer associated with that firm. 6. The Investor then indicated that before he would proceed with the transaction, he wanted written assurances from the assignor of the T-Bills. In response, the Investor was told that he needed to wire a good faith deposit of $300,000, representing one month’s lease payment, to a Euro-Atlantic safe keeping account before the written assurances would be given. The Investor was told that the Registered Representative would release the $300,000 to the Supplier only after the Investor had received the written assurances, and simultaneously, the Supplier would assign the $10 million in T-Bills to the Investor and deposit them into the Investor’s margin account. 7. Accordingly, the Registered Representative sent the wire instructions to the Investor along with a cover memorandum assuring him that the $300,000 would be held in "safekeeping" until the Investor received the written assurances that he wanted from the assignor of the T-Bills. The Investor immediately wired the $300,000 deposit to Euro-Atlantic according to the instructions provided by the Registered Representative. Rather than directing that the funds be wired into a safekeeping account, however, the Registered Representative had directed that they be wired into an account at Euro-Atlantic controlled by an associate of the Supplier ("Associate"). Almost immediately after receiving the wire from the Investor, the Registered Representative wired $294,900 of the Investor’s funds out of the Associate’s account. Of this amount, $44,900 went to the Supplier and the Associate, and the remaining $250,000 was used to pay the purported assignor of the T-Bills. The $5,100 left in the account was the Registered Representative’s finder’s fee. 8. The Investor never received the written assurances he was promised before the funds would be released. In addition, the Investor never received any T-Bills nor did he have a margin account opened in his name. **FOOTNOTES** [1]: The finding herein are made pursuant to Respondent Madden’s Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. Primary Violations of the Federal Securities Laws by the Registered Representative: 1. The Registered Representative violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by engaging in a scheme to defraud the Investor out of $300,000. The Registered Representative falsely represented to the Investor that his $300,000 would be used to "lease" T-Bills, which would fund a margin trading account opened in his name. He further represented that the Investor’s funds would remain in a safekeeping account at Euro-Atlantic until the Investor received adequate written assurances as to the ownership of the T-Bills. He also provided the Investor with phony documentation to make the transaction appear legitimate. Each of these misstatements of fact would be material to a reasonable investor in determining whether to proceed with the transaction. See Basic v. Levinson, 485 U.S. 224 (1988). Respondent Madden’s Failure to Supervise 1. At all relevant times, as branch manager of the Chicago branch office, Respondent Madden was responsible for supervising the Registered Representative. Madden failed to reasonably supervise the Registered Representative by failing to follow Euro-Atlantic’s supervisory procedures designed to detect the kind of fraudulent activity perpetrated by the Registered Representative with the help of his accomplices. Specifically, Madden failed to review incoming and outgoing correspondence, including facsimiles, that were sent to and from the Chicago branch as required by Euro-Atlantic’s supervisory procedures manual. Virtually all of the documents relating to the T-Bill transaction passed through the Chicago branch office, including lease contracts, wire instructions, and margin account forms. The Registered Representative also sent the Investor memoranda he prepared himself on Euro-Atlantic letterhead. In turn, the Investor sent numerous documents, including overnight packages, to the Registered Representative at the Chicago branch office. In sum, almost all of the documents relating to the T-Bill transaction went through the Chicago branch office without Respondent Madden's review or approval. 2. Respondent Madden was also informed by the operations manager at the Chicago branch office that she had discovered the Registered Representative using the facsimile machine to send out documents that had not been approved by Madden. The operations manager repeatedly complained to Madden about the Registered Representative’s unauthorized use of the facsimile machine. Nevertheless, Respondent Madden never disciplined or reprimanded the Registered Representative for violating Euro-Atlantic procedures or enhanced his supervision of the Registered Representative. 3. Respondent Madden also ignored several "red flags" that indicated the Registered Representative was involved in a fraudulent transaction. For example, Madden was aware that the Registered Representative had received several phone calls from the Investor and "witnessed" the Registered Representative’s signature on a document.. The document purported to pay the Registered Representative commissions in connection with a "$10 million T-Bill Trade Program," yet Madden made no inquiry of the Registered Representative. Madden also allowed the Registered Representative to open four trading accounts controlled by the Associate. Although each new account form (one of which Madden had signed) indicated that the Associate’s company had a net worth of $500 million, Madden failed to question the Registered Representative about it further. Nor did Madden direct the Registered Representative to obtain independent verification of that figure even though no other Euro-Atlantic customer had ever claimed a net worth even near that amount. Instead, Respondent Madden allowed the Registered Representative to open the four accounts without further inquiry. As noted above, one of these accounts was used to temporarily "park" the Investor’s funds before they were misappropriated. 4. Respondent Madden also failed to prevent the Investor’s $300,000 from being disbursed to the Supplier, Associate, and purported assignor of the T-Bills when he first learned of the transaction. Madden was notified by Euro- Atlantic's clearing firm that $300,000 had been wired into one of the Associate’s accounts with no trade pending. Upon questioning the Registered Representative about the wire, Madden was given information and documents which should have alerted him to the dubious nature of the T-Bill transaction and the central role the Registered Representative may have played. Madden should have also been suspicious since the Registered Representative had never given notice to the firm that he intended to engage in a transaction away from the firm, as he was required to do under Euro-Atlantic procedures. Moreover, Madden admitted he had never heard of "leasing" T-Bills, did not understand how it was supposed to work, and could not find anyone who would confirm that it was a legitimate transaction. 5. Accordingly, Madden failed reasonably to supervise the Registered Representative who was subject to his supervision with a view to preventing the Registered Representative’s violations described above of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5, thereunder. IV. Based on the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified by Respondent Madden in his Offer of Settlement. Accordingly, IT IS ORDERED that: 1. Respondent Madden be, and hereby is, suspended from association with any broker or dealer for a period of three months, effective on the second Monday following the entry of this Order. Madden shall provide to the Commission, within ten (10) days after the end of the three month suspension period described above, an affidavit that he has complied fully with the terms of the suspension. 2. Respondent Madden be, and hereby is, suspended from association in a supervisory and proprietary capacity with any broker or dealer for a period of nine months immediately following the period of his suspension from association. Madden shall provide to the Commission, within ten (10) days after the end of the nine month suspension period described above, an affidavit that he has complied fully with the terms of the suspension. 3. Respondent Madden shall, within thirty (30) business days after the entry of the Order, pay a civil money penalty in the amount of $5,000 to the United States Treasury. Such payment 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) hand-delivered to the Comptroller, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, Mail Stop 0-3; and (d) submitted under cover letter which identifies Madden as a respondent in these proceedings, the file number of this proceeding, a copy of which cover letter and money order or check shall be sent to J. Cindy Eson, Esq., Southeast Regional Office, Securities and Exchange Commission, 1401 Brickell Avenue, Suite 200, Miami, FL 33131. By the Commission. Jonathan G. Katz Secretary