 |
Home | Previous Page | |
|
||
 |
|
|
|
||
 |
|
|
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
UNITED STATES OF AMERICA
|
In the Matter of ROUNDHILL SECURITIES, INC.,
Respondents. |
: |
ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS AND ISSUING CEASE-AND-DESIST ORDERS |
I.
The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest to institute public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether (1) Round Hill Securities, Inc. ("Round Hill"), Robert J. Holub ("Holub") and Robert S. Minka ("Minka") failed reasonably to supervise Sunil F. De Silva ("De Silva") and Braxton G. Grizzard ("Grizzard") with a view to preventing their violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and (2) whether De Silva and Grizzard willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
In anticipation of the institution of these administrative proceedings, the Respondents have each submitted an Offer of Settlement ("Offers"), 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 set forth herein, except that each Respondent admits the jurisdiction of the Commission over them and over the subject matter of these proceedings, which are admitted, the Respondents consent to the entry of the findings and remedial sanctions set forth below.
Accordingly, IT IS HEREBY ORDERED that public administrative and cease-and-desist proceedings pursuant to Section 8A of Securities Act and Sections 15(b) and 21C of the Exchange Act be, and hereby are, instituted.
II.
On the basis of this Order and the Offers submitted by the Respondents, the Commission makes the following findings:
A. RESPONDENTS
Round Hill Securities, Inc., has been registered with the Commission as a broker-dealer since 1993. In March 1997, the NASDR's District Business Conduct Committee No. 1 censured Round Hill, Minka and Holub individually, fined Round Hill $5,000, fined Holub and Minka each $2,500 and assessed administrative costs against them because, in 1995, Round Hill, acting through Holub and Minka, effected principal transactions with customers without seeking the NASD's approval. In July 1999, the NASDR fined Round Hill $9,500 (jointly and severally with Minka) because, at various times in 1996, Round Hill, acting through Minka, participated as a co-underwriter in two offerings of securities and held client shares instead of forwarding them to the clearing firm in violation of the firm's membership agreement with the NASD, and sold premium-priced shares of a new issue to an associated person of the firm, among other things.
Robert J. Holub, age 48, is the chairman of the board of directors of Round Hill's parent company, Round Hill Holdings, Inc. ("Round Hill Holdings"), in which he owns a 48% share. Holub was Round Hill's president and CEO from December 1993 to June 1996, and again from July 1997 to February 2000. In March 1997, the NASDR's District Business Conduct Committee No. 1 censured Round Hill, Minka and Holub individually, fined Round Hill $5,000, fined Holub and Minka each $2,500 and assessed administrative costs against them because, in 1995, Round Hill, acting through Holub and Minka, effected principal transactions with customers without seeking the NASD's approval. Holub registered with the Commission as an investment adviser in December 2000.
Robert S. Minka, age 41, served as Round Hill's chief compliance officer since April 1995. Minka also served as the firm's chief financial officer at various times and as a direct supervisor of registered representatives. In March 1997, the NASDR's District Business Conduct Committee No. 1 censured Round Hill, Minka and Holub individually, fined Round Hill $5,000, fined Holub and Minka each $2,500 and assessed costs against them because in 1995, Round Hill, acting through Holub and Minka effected principal transactions with customers without seeking the NASD's approval. In July 1999, the NASDR fined Minka $9,500 (jointly and severally with Round Hill) because, in 1995, Round Hill, acting through Minka, participated as a co-underwriter in two offerings of securities and held client shares instead of forwarding them to the clearing firm in violation of the firm's membership agreement with the NASD, and sold premium-priced shares of a new issue to an associated person of the firm, among other things.
Sunil F. De Silva, age 46, was a registered representative in Round Hill's Beverly Hills, California, office from March 1995 to November 1997. De Silva is not currently associated with any registered entity.
Braxton G. Grizzard, age 49, was a registered representative in Round Hill's Honolulu, Hawaii, office from September 1996 to March 1998. He is currently associated with Brookstreet Securities Corporation ("Brookstreet"), a broker-dealer headquartered in Irvine, California.
B. FACTS
1. Summary
Between January 1996 and November 1997, De Silva, a registered representative who worked in Round Hill's Beverly Hills, California, office, willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by defrauding three clients through churning (excessive trading of securities for the purpose of generating commissions), and unsuitable recommendations (investing in high risk securities, contrary to a client's conservative investment objectives). De Silva also misappropriated for his own use funds that several clients had entrusted to him for securities purchases. These fraudulent practices resulted in client losses of $39,356 and these clients paid commissions totaling $43,835 and margin interest totaling $6,619.
Between November 1996 and February 1998, Grizzard, a registered representative who worked in Round Hill's Honolulu, Hawaii, office, willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by defrauding two clients through churning and unsuitable recommendations. Grizzard's fraudulent practices resulted in client losses of 36,184.89.1 These clients paid commissions totaling $37,443, and one client paid margin interest of $5,810.32.
In turn, Round Hill, Holub and Minka failed reasonably to supervise the registered representatives with a view toward preventing their securities laws violations. At various times prior to August 1996, Round Hill and Holub failed to establish procedures reasonably designed to detect and prevent the registered representatives' repeated violations of the federal securities laws. Although Round Hill adopted various procedures in and after August 1996, certain of those procedures were not reasonably designed to detect and prevent securities laws violations, and Holub did nothing to correct these procedures when he again served as president of the firm in July 1997. Moreover, to the extent that Round Hill's procedures were reasonable, Holub and Minka still failed to follow those procedures and, thus, failed to detect and prevent the registered representatives' fraudulent conduct.
2. The Registered Representatives' Fraudulent Conduct
a. De Silva
Between January 1996 and November 1997, De Silva willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by defrauding two clients ("Client A" and "Client B") through churning, and unsuitable recommendations. The clients were unsophisticated investors with limited assets, and they informed De Silva that they had conservative investment objectives. De Silva controlled these accounts and profited from churning them in disregard of his clients' interests. De Silva also misappropriated $130,500 from the bank account of an investment club formed by several of his other clients and lied to them about the status of the account.
Churning. Between January 1996 and July 1997, the average equity in Client A's account was $25,998. During this same period, Client A had an annualized turnover ratio of approximately 13,2 an annualized cost-to-equity factor of about 67%,3 and realized losses of $4,767. Client A paid commissions of $30,698 and margin interest of $4,309. Twenty-five of the 35 securities purchased in this account were held for under 60 days.
Between May 1996 and November 1997, the average equity in Client B's account was $14,333. During this same period, Client B's account had an annualized turnover ratio of about 14, and an annualized cost-to-equity factor of approximately 68%. His realized losses were $34,589, and he paid commissions of $13,138 and margin interest of $2,310. Thirteen of 26 securities purchased in this account were held for under 60 days.
Suitability. In light of Client A's and Client B's conservative investment objectives, De Silva's short-term trading and use of margin in these accounts was unsuitable. Both clients told De Silva they were unsophisticated investors. Neither client knew, nor did De Silva explain, that by signing Round Hill's standard account opening form they were agreeing to trade using margin. Further, De Silva never discussed with Client A or Client B that he would use margin in their accounts and he failed to explain to them the risks and consequences of margin trading. Both clients were owners of small businesses and each was the primary income provider for his family. Neither of these clients had substantial liquid assets.
Misappropriation. In July 1996, De Silva opened a brokerage account for several of his clients who had formed an investment club. The clients agreed that De Silva would make investment decisions for the club. To facilitate the collection of investment contributions from the clients, De Silva also opened a bank account for the investment club. Between July 1996 and November 1997, De Silva misappropriated for his own use $130,500 from the investment club's bank account.4
Scienter. De Silva concealed his fraud by assuring Clients A and B that De Silva's trading in their account would result in large rewards. He told both clients not to look at their account statements, but to trust him instead. He explained margin call notices to both clients as "mistakes" that he would fix. He never disclosed that margin trading was unsuitable for either client. Similarly, he never explained the risks of margin and in-and-out trading (holding securities for under six months), or that clients A and B would be liable for the margin balance and interest. De Silva also concealed his misappropriation from the investment club by telling the members that their account produced far in excess of the account's actual value. Based on De Silva's deceitful conduct, he knew that his fraudulent trading and transactions in the accounts of Clients A and B and the investment club would harm these clients while he profited.
b. Grizzard
Between November 1996 and February 1998, Grizzard willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by defrauding two clients ("Client C" and "Client D") through churning and unsuitable recommendations. Each of the clients was retired and living on a limited income, and each had been recently widowed. Both clients were unsophisticated investors with conservative investment objectives.
Churning. From November 1996 to April 1997, Grizzard excessively traded Client C's account, in light of her conservative investment objective and low risk tolerance. Grizzard controlled this account and profited at Client C's expense. The average equity in the account was $103,495. During this period, the account had an annualized turnover ratio of more than 20 times the average balance. The annualized cost-to-equity factor was approximately 28%.
Suitability. From November 1996 to April 1997, Grizzard engaged in short-term trading and he used margin in Client C's account, all of which was unsuitable for her in light of her conservative investment objectives. For example, over a six-month period, 45 of 48 securities in Client C's account were held for under 30 days. Grizzard exposed Client C to even further risk by purchasing these securities on margin. Further, during this same period, Grizzard traded Client C's account on margin, without her informed consent or knowledge. Client C told Grizzard that she was an unsophisticated investor. Client C did not know, nor did Grizzard explain, that by signing Round Hill's standard account opening form she was agreeing to trade using margin and that certain of the monthly withdrawals she made to meet expenses were also drawn on margin.
With regard to Client D, from November 1996 to February 1998, Grizzard concentrated that client's portfolio in below investment-grade bonds, which was unsuitable for her given her conservative investment objectives. During this period, Grizzard invested between 92% and 100% of Client D's account in below investment-grade bonds. Significantly, in December 1997, Grizzard sold several recently purchased speculative bonds in Client D's account to buy $350,000 worth of an unrated bond which was guaranteed by a company in Indonesia. This investment represented 99% of Client D's account value. Two weeks after this purchase, the value of Client D's holdings in the bond had declined to $188,000. Grizzard failed to warn Client D about the risks of trading in below investment-grade bonds.
Scienter. Grizzard knew his conduct in Client C's and Client D's accounts was fraudulent. He failed to tell Client C that he would trade her account on margin, that she would be liable for the margin balance and interest, and that her monthly withdrawal checks were drawn on margin. Despite knowing that Client C and Client D were unsophisticated in investment matters, Grizzard failed to explain the risks of margin and in-and-out trading to Client C, and he failed to warn client D about investing in below investment-grade bonds.
3. Round Hill's, Holub's and Minka's Failure Reasonably to
Supervise the Registered Representatives
Section 15(b)(4)(E) of the Exchange Act authorizes the Commission to sanction a broker-dealer for failing reasonably to supervise its registered representatives, with a view to preventing violations of the securities laws, unless the firm: (1) has established procedures and a system for applying the procedures "which would reasonably be expected to prevent and detect, insofar as practicable, any such violation," and (2) it "reasonably discharged" its duties and obligations under those procedures without reasonable cause to believe that the firm was not complying with its procedures.
The president of a broker-dealer is ultimately responsible for the federal securities laws violations of an associated registered representative unless and until he reasonably delegates that particular supervisory function to another person in that firm, and neither knows nor has reason to know that such person's performance is deficient. In the Matter of Thomas F. White, 57 S.E.C. Docket 486, 489 (1994); see also, In re David D. Grayson, Exchange Act Release No. 33298 (Dec. 8, 1993). Supervisors must also respond not only when they are "explicitly informed of an illegal act" but also when they are "aware only of `red flags' or `suggestions' of irregularity." In re John H. Gutfreund, Exchange Act Release No. 31554 (Dec. 3, 1992).
The supervision of registered representatives by Round Hill, Holub and Minka was deficient in several significant ways. First, between December 1993 and August 1996, Round Hill and Holub failed altogether to adopt procedures calculated to detect and prevent securities violations while De Silva churned two customer accounts. Second, certain of the procedures that Round Hill established in or after August 1996 were not reasonably designed to prevent and detect fraud. These supervisory failures hindered the firm's ability to detect and prevent Grizzard's and De Silva's fraud. Third, Round Hill's system to implement its supervisory procedures was deficient in several respects. And finally, Holub and Minka failed to follow those of the firm's established procedures that were reasonably designed to detect and prevent securities violations.
a. From December 1993 to August 1996, Round Hill and Holub Failed to Establish Procedures for Account Review
From December 1993 to August 1996, Round Hill had no procedures relating to client account review. In actual practice, members of the firm's management reviewed the consolidated daily blotter (a computer-generated document that detailed Round Hill's trades of the previous day), and sporadically, exception reports (which were discarded after 30 days) for the firm's registered representatives who were mostly independent contractors working in remote locations.
Beginning in December 1993, Holub served as the firm's president and CEO. In June 1995, the Commission examination staff sent a deficiency letter to Round Hill, which was addressed to Holub. The examination staff stated that the firm's "written supervisory procedures do not detail methods supervisory personnel should undertake to detect sales practice abuses such as excessive trading, churning, and other abuses." The letter also stated that the firm failed to inspect branch offices according to the schedule in its written supervisory procedures. In response, Round Hill sent the staff a letter saying that it would prepare an updated supervisory manual no later than August 31, 1995. However, the manual was not updated until August 1996.
Holub resigned from his executive positions in June 1996 due to family obligations. In June 1996, the NASD completed an examination of Round Hill and told the firm that its written supervisory procedures were inadequate because they failed reasonably to address, among other things, procedures for client account and branch office reviews, the review and detection of suitability and churning, and the supervision of branches. Overall, the NASD found that Round Hill had still not implemented an appropriate supervisory system.
Because of Round Hill's and Holub's failure prior to August 1996 to adopt reasonable procedures for customer account review, Round Hill failed to detect and prevent De Silva's churning in Client A's account from January through August of 1996.
b. Although Round Hill Adopted New Procedures Beginning In August 1996, The Procedures Either Were Not Reasonably Designed To Prevent Securities Laws Violations, Or Were Not Reasonably Implemented
In August 1996, Round Hill adopted account review procedures, and in October 1996, the firm adopted heightened supervision procedures. However, the account review procedures were unreasonable, and Round Hill and Holub (after he resumed his duties as president in July 1997) failed to establish a system to implement other procedures, such as heightened supervision and audit procedures, which were reasonable.
i. August 1996: Round Hill's New Account Review Procedures
The new account procedures stated that "designated principals" would be responsible for the supervision of all client accounts. However, these procedures still: failed to specify how or when a principal was supposed to conduct a review; did not provide any guidelines or numerical parameters for analyzing exception reports or trade blotters; did not require follow-up of suspicious activity or provide guidance on how such activity could be pursued; and did not provide a mechanism for documenting a supervisor's review. When Holub returned as president in July 1997, he did nothing to cure the deficiencies in the procedures. As a result, even after August 1996, Round Hill's account review procedures were not reasonably designed to detect and prevent continued churning by De Silva and Grizzard.
ii. Round Hill and Holub Failed To Establish A Reasonable
System To Implement Its Procedures
Despite two warnings from regulators, Round Hill and Holub (during the period he served as president of Round Hill), failed to establish a reasonable system to implement those of the firm's procedures that were reasonable, such as the heightened supervision and enhanced audit procedures. None of these procedures was implemented prior to July 1997. Further, Round Hill and Holub (during the period he served as president of the firm) failed to train the compliance and supervisory personnel adequately to be effective in their positions. They also failed to establish procedures specifying the duties of the supervisors and instruct them on how to carry out those duties.
Because the firm and Holub failed to adopt reasonable procedures and establish a system to implement them, Round Hill failed to discover De Silva's misconduct that occurred between August 1996 and November 1997, and Grizzard's misconduct that occurred between November 1996 and February 1998.
iii. Holub and Minka Failed To Follow Round Hill's
Established Procedures
At various times between January 1996 and February 1998, Holub and Minka (as Grizzard's direct supervisor) failed to enforce or follow the firm's procedures -- to the extent that they were reasonable -- relating to account review, heightened supervision and branch audits. Holub failed to take timely action in response to regulatory agency warnings about the firm's deficient supervisory system, and Holub and Minka failed to respond to red flags (including Client C's complaint) concerning Grizzard's and De Silva's sales abuse practices.
Account Review Procedures. Holub failed to enforce the August 1996 account review procedures. There is no evidence that Round Hill's supervisors followed procedures to monitor the activity of the brokers they were assigned to supervise. Specifically, the firm failed to take action on: an exception report showing churning in a client account that De Silva managed; the trading desk's reports that De Silva engaged in a pattern of canceling security purchases from one client's account and placing those same trades in another client's account; and De Silva's client accounts that were frequently subject to margin calls. Also, compliance department employees testified that they reviewed the exception reports, but these reports were destroyed without any follow up. The compliance analysts, who were untrained, were instructed to alert the direct supervisors regarding irregularities that appeared on the exception reports, and supervisors took action only if an analyst advised them of such irregularities.
When Holub returned as president and CEO in July 1997, he did nothing to ensure that supervisors followed Round Hill's revised account review procedures, or to correct the deficiencies noted by the NASD. As a result, the firm failed to detect De Silva's and Grizzard's misconduct.
Minka, as Grizzard's supervisor, failed to conduct even ordinary review of Grizzard's client accounts, which resulted in Minka's and the firm's failure to detect churning in Client C's account and unsuitable trading and margin use, and to prevent Grizzard's unsuitable bond purchases in Client D's account.
Branch Office Audits. Even after Round Hill adopted enhanced audit procedures in August 1996, which included account review, Holub and the firm's auditors ignored scheduling and account review procedures on audits. Round Hill's audit records show that between 1993 and 1997, the majority of the firm's audits were conducted only when agency regulators appeared to examine the firm. For example, the Beverly Hills audit occurred more than two years after Round Hill's scheduled completion deadline. The firm's audit report shows that a client account managed by De Silva was selected for review, but the auditor failed to detect churning in that account. If audits had been conducted according to the firm's schedule and if they had included account review specified by the firm's procedures, the auditors might have detected the churning in De Silva's and Grizzard's customer accounts.
Although Holub delegated audit responsibilities to the firm's chief compliance officer, Holub (while he was president) did nothing to ensure that the firm's audit procedures were followed. Holub's failure to follow the firm's audit procedures resulted in the firm's failure to detect Grizzard's and De Silva's fraudulent conduct.
Heightened Supervision. In October 1996, Round Hill adopted heightened supervision procedures that stated (among other things) that registered representatives with tax liens were subject to "Level 2" supervision, which required that "customer account activity should be reviewed for indications of a repeat of any previous allegation as well as excessive trading; unauthorized trade [sic]; suitability issues." Under these procedures, Grizzard should have been placed on heightened supervision by November 1996 because he had a tax lien in excess of $77,000. At that time, however, no principal acknowledged responsibility for Grizzard's supervision. Although Minka became Grizzard's supervisor in January 1997, he failed to assign Grizzard to heightened supervision even though Minka knew about Grizzard's tax lien.
Moreover, had Minka conducted a reasonable review of Grizzard's client account activity (also required under the heightened supervision procedures) after learning about the tax lien, he would have noticed the extraordinary amount of trading that occurred monthly in Client C's account between January 1997 and April 1997. During those four months, the net equity in the account, excluding Client C's withdrawals, dropped by $28,633 representing a 20% decline in the account's value. The turnover ratio for that four-month period was 8.13.
In June 1997, Client C filed an arbitration action alleging that Grizzard had recommended unsuitable securities and churned her account. The firm's compliance consultant sent Minka (and Holub) a memorandum showing that from November 1996 to April 1997 the turnover ratio was 11.862 (an annualized ratio of 23.724). As a result, in July 1997, Grizzard was assigned to heightened supervision.
However, Minka also failed to review the account activity for any of Grizzard's other clients for churning or suitability issues. As a result of Minka's supervisory failures, he later failed to detect the unsuitable purchase and sale of additional below investment-grade bonds in Client D's account in September 1997.
While De Silva was assigned to Level 2 heightened supervision in October 1996 for canceling trades in one client's account and rebilling them to another client account, and for a personal bankruptcy, no one at Round Hill actually applied heightened supervision procedures to him. During most of the period between October 1996 and November 1997, no principal acknowledged being his supervisor. One principal who admitted supervising De Silva for approximately five months did not know how to conduct the account review required under the heightened supervision procedures. Thus, no one at Round Hill applied heightened supervision procedures to De Silva. As a result, Holub, during the period he served as Round Hill's president, was responsible for this failure to follow Round Hill's heightened supervision procedures.
4. Holub's Delegation of His Supervisory Responsibilities to Round Hill's Chief Compliance Officer Was Not Reasonable
As Round Hill's president and CEO, Holub was responsible for supervision of the firm's registered representatives, as well as the firm's written supervisory procedures. Holub delegated the responsibility of revising the firm's supervisory policies to the firm's chief compliance officer. However, as noted above, Holub received warnings in 1995 and 1996 that the supervisory structure that the chief compliance officer put in place was inadequate in several important respects. The fact that the chief compliance officer failed to produce suitable supervisory procedures, even after regulatory warnings, gave Holub notice that his delegation was unreasonable.
Based on the foregoing, Round Hill and Holub failed reasonably to supervise Grizzard and De Silva, and Minka failed reasonably to supervise Grizzard, with a view toward preventing the registered representatives' violations of the securities laws.
5. Sanctions Against Grizzard
Grizzard has submitted a sworn Statement of Financial Condition dated December 31, 2001, and other evidence and has asserted his inability to pay a civil penalty.
III.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers submitted by Round Hill, Holub, Minka, De Silva and Grizzard, and impose the sanctions specified therein.
Accordingly, IT IS ORDERED that:
The payments must be made to the United States Treasury within 30 days of the entry of this Order. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check, or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Suite B, Alexandria, Virginia, 22312-0003; and (4) submitted under cover letter which identifies the Respondent and this proceeding, as well as the Commission's case number. A copy of the cover letter and money order or check shall be sent to the District Administrator, Securities and Exchange Commission, 44 Montgomery Street, 11th Floor, San Francisco, California, 94104;
IT IS FURTHER ORDERED that the Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Grizzard provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of the maximum civil penalty allowable under the law. No other issue shall be considered in connection with this petition other than whether the financial information provided by Grizzard was fraudulent, misleading, inaccurate, or incomplete in any material respect. Grizzard may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of a penalty should not be ordered; (3) contest the imposition of the maximum penalty allowable under the law; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense;
K. Round Hill shall comply with its undertakings as follows:
(i) Round Hill shall retain, within 30 days of the date of the Order, at its own expense, an Independent Consultant not unacceptable to the Commission staff to, among other things, conduct a comprehensive review of Round Hill's supervisory and compliance policies, procedures, and systems concerning the prevention and detection of the violations of the federal securities laws of the nature involved in this matter. The comprehensive review must include, at a minimum, those procedural deficiencies identified in Section II above. Round Hill shall cooperate fully with the Independent Consultant and shall provide the Independent Consultant with full access to its files, books, records, and personnel;
(ii) At the conclusion of the review, which in no event shall be more than 90 days after the date of the Order, the Independent Consultant shall submit to Round Hill and to the Commission's staff a written Initial Report. The Initial Report shall describe the review performed and the conclusions reached, and shall include any recommendations deemed necessary to make the policies, procedures, and system of supervision and compliance adequate;
(iii) Within 120 days of the date of the Order, Round Hill shall in writing advise the Independent Consultant and the Commission's staff of the recommendations from the Initial Report that it has determined to accept and the recommendations that it considers to be unduly burdensome. With respect to any recommendation that Round Hill deems unduly burdensome, Round Hill may propose an alternative policy, procedure or system designed to achieve the same objective or purpose. Round Hill and the Independent Consultant shall attempt in good faith to reach agreement within 150 days of the date of the Order with respect to any recommendation that Round Hill deems unduly burdensome. If the Independent Consultant and Round Hill are unable to agree on an alternative proposal acceptable to the Commission's staff, Round Hill shall abide by the recommendation of the Independent Consultant;
(iv) Within 150 days of the date of the Order, Round Hill shall, in writing, advise the Independent Consultant and the Commission's staff of the recommendations and proposals that it is adopting;
(v) The Independent Consultant shall complete the aforementioned review and submit a written Final Report to Round Hill and to the Commission's staff within 180 days of the date of the Order. The Final Report shall recite the efforts the Independent Consultant undertook to review Round Hill's supervisory and compliance policies, procedures, and systems; set forth its conclusions and recommendations; and describe how Round Hill is implementing those recommendations;
(vi) Round Hill shall take all necessary and appropriate steps to adopt and implement all recommendations contained in the Independent Consultant's Final Report;
(vii) No later than one year after the date of the Independent Consultant's Final Report, the Independent Consultant shall conduct a follow-up review of Round Hill's efforts to implement the recommendations contained in the Final Report, and shall submit a follow-up report to the Commission's staff. The follow-up report shall set forth the details of Round Hill's efforts to implement the recommendations contained in the Final Report, and shall state whether Round Hill has fully complied with the recommendations in the Final Report;
(viii) For good cause shown, and upon receipt of a timely application from the Independent Consultant or Round Hill, the Commission's staff may extend any of the procedural dates set forth above; and
(ix) To ensure the independence of the Independent Consultant, Round Hill: (a) shall not have the authority to terminate the Independent Consultant without the prior written approval of the Commission's staff; (b) shall compensate the Independent Consultant, and persons engaged to assist the Independent Consultant, for services rendered pursuant to the Order at their reasonable and customary rates; and (c) during the period of engagement and for two years after the engagement, shall not enter into any employment, customer, consultant, attorney-client, auditing, or other professional relationship with the Independent Consultant. Any firm with which the Independent Consultant is affiliated or of which he or she is a member, in performance of his/her duties under this Order shall not, without prior written consent of the Commission's staff, enter into any employment, customer, consultant, attorney-client, auditing, or other professional relationship with Round Hill, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | Between February 28, 1998, and December 18, 2001, one client had unrealized losses of $182,565.05 on an initial purchase of an Indonesian-company bond for $350,000. During this period, there was virtually no market for the bonds. In December 2001, the issuer obtained new financing and redeemed the client's bonds for $631,729.26. |
| 2 | The turnover ratio is calculated by taking the total dollar amount of securities purchases in an account and dividing it by the average account equity during that period. |
| 3 | This means that the account would have to appreciate more than 67% just to break even. The cost-to-equity ratio was calculated by dividing total expenses by average monthly equity. See In the Matter of the Application of Peter C. Bucchieri, Exchange Act Rel. No. 37218 (May 14, 1996). |
| 4 | After certain investment club members complained that the account's actual value was less than what De Silva represented, De Silva redeposited $45,300 in September 1997; then he paid $85,200 to the members directly in February 1998. |
http://www.sec.gov/litigation/admin/33-8080.htm
| Home | Previous Page | Modified: 04/09/2002 |