October 8, 2001

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Flurry of Enforcement Actions Raises Questions About Commission Direction

From the Editors of IA Week:

For nearly two years beginning in January 1997, David F. Bellet, managing director of New York-based Crown Capital Management and co-owner of its two affiliated advisory firms, filed "fictitious" personal trading. Reports and concealed "several hundred" actual transactions from the firm's compliance officer, according to an SEC order released September 28. Bellet cooperated with SEC examiners and his conduct, said the SEC, did not "adversely affect" either the firm or its clients.

Without admitting or denying the personal trading charges, Bellet agreed to a cease and desist order requiring him to refrain from future violations of the Investment Adviser Act's books and records requirements. He was not suspended, barred from acting as an adviser, fined, or subject to more serious charges.

Burlier this year, Bellet's advisory firms withdrew their SEC registration, though Crown Advisors International maintains an active Web site.

Bellet declined to comment on the case.

Given the SEC's oft stated objective of getting tough on personal trading violations (lA Week, September 17, 2001), did Bellet get off easy? And if so, does this case, combined with the recent flurry of additional enforcement actions related to internal controls and performance presentation, signify a new "kinder and gentler" approach on the part of SEC enforcers?

There's less here than meets the eye, said Karen Pennington, assistant regional director in the SEC Northeast Regional Office. Yes, Bellet-in an effort to demonstrate his investment acumen to his colleagues-submitted false trading reports based on winning transactions in which he never participated, said Pennington. But those actions had no affect on the firm's operations and he "did not defraud any clients." Bellet's actions, said Pennington, were procedural-they had no effect other than "causing the rule violations."

Plus, Bellet provided "significant" cooperation to SEC staff investigating the matter and "expedited" resolution of the matter. That cooperation was taken into account when the Commission staff recommended its relatively lenient course of action, said Pennington.

While acknowledging that particular facts and circumstances of any case make outside judgment about a specific sanction difficult, the SEC order still stands out because of the leniency of the penalty, said Richard A. Levan, of Levan Friedman, LLP . Bellet's conduct, said the former SEC senior enforcement attorney, was "outright fraudulent and deceptive and occurred over a long period of time. It goes to the heart of the advisory duties of candor and accurate disclosure."

Further, said Levan, "The fact that nobody was 'hurt'-or that upon investigation he chose to correct the fraudulent records he prepared-is small comfort."

One thing is clear, said Pickard and Djinis's Mari Anne Pisarri, "this guy had a great lawyer." Beyond that, Pisarri speculated, the leniency might have been related to the firm's withdrawn registration. "The thinking may have been 'he's out of business so let's go easier on him, ", said Pisarri.

The Bellet case was one of many adviser-related actions taken as part of the SEC's annual end-of-fiscal-year enforcement wrap-up. Levan termed the early autumn enforcement announcements a "year-end regulatory fire sale," while another former SEC enforcement attorney termed the sanctions decidedly "lighter than previous" penalties for such violations.

Among the cases:

A September 27 Commission Order resulted in a cease and desist finding against Performance Analytics and one of its principals, Robert P. Moseson. Performance Analytics is an Illinois-based consulting firm that assists institutional investors in their adviser selection process. The charge: presenting inaccurate performance history of an advisory firm managed by a former Performance Analytics affiliated broker to the firm's clients.

Moseson, who neither admitted nor denied the findings within the Order, was suspended from the advisory business for three months and fined $25,000. "Based on my knowledge of SEC penalties, this represents a significant departure as to the severity of the sanctions," said Levan. Moseson referred IA Week inquires to his attorney, who declined to comment on the specifics of the case. Meanwhile, the adviser who sought business from Performance Analytics' clients and its principal face an upcoming SEC hearing related to the case.

On September 28, the Commission instituted a public administrative proceeding against Legg Mason (LM) Fund Adviser and Western Asset Management (WAM) for "failing to reasonably supervise" the portfolio manager for two of its funds. According to the Commission, the portfolio manager, with the assistance of a broker-dealer, inflated the value of troubled securities, which caused one of the funds to materially overstate its net asset value.

LM Fund Adviser failed to have adequate policies and procedures to respond adequately to indications that the portfolio manager was overstating the value of one of the fund's securities. W AM, meanwhile, failed to have adequate policies and procedures designed to prevent securities violations by the portfolio manager, the SEC said. While neither admitting nor denying the order's claims, LM Fund Advisor and WAM were each censured, fined $50,000, and agreed to bolster their respective supervisory policies and procedures.

In the 10 investment adviser-related enforcement actions taken the last two days of September, penalties ranged from Bellet's cease and desist order to a six-figure disgorgement and oneyear suspension to James Saltzman, an advisory firm managing partner charged with failing to disclose loans he took from a partnership the firm advised.

At least three questions are raised by the late September actions. First, will the SEC tread more lightly on firms that cooperate with investigators? "In the past, the amount of credit one got for cooperating was dubious at best-whether this represents a departure is a fair question," said Levan.

Next, will the Commission differentiate more aggressively between violations of a procedural nature and those that actually result in client losses? One lawyer termed this a "no harm, no foul" approach.

Finally, do these enforcement actions represent a change in direction resulting from the Commission chairmanship of Harvey Pitt, a former securities industry .defense attorney? Pitt, as a lawyer in private practice, was critical of the Commission's enforcement practices. Writing of an unrelated case in August 1997, Pitt lamented an "enforcement process...used to craft rules for public companies and market participants" where "good people trying to do the right thing nonetheless...get enmeshed in the litany of subpoenas and testimony under oath. "

Still, agreed the securities attorneys, his tenure has been too short to make any definitive judgments. "I'd like to see a series of kinder-gentler actions before declaring a trend," said Pisarri.

"It's way too early" to determine if Pitt has had such an influence on the Commission's enforcement proceedings, said one former Commission enforcement attorney. Nevertheless, there has been a perception among the defense bar that the SEC Enforcement Division has over the past several years been overly aggressive on relatively small matters, he said.