SECURITIES EXCHANGE ACT OF 1934
Release No. 49824 / June 8, 2004
ADMINISTRATIVE PROCEEDING
File No. 3-11514
In the Matter of FIDELITY NATIONAL CAPITAL INVESTORS, INC., Respondent. |
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ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AS TO FIDELITY NATIONAL CAPITAL INVESTORS, INC. |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") against Fidelity National Capital Investors, Inc. ("Fidelity" or "Respondent").
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Order"), as set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
Respondent
1. During the relevant period, Fidelity was a registered broker-dealer, a subsidiary of Fidelity National Corp., and was incorporated in Georgia in 1992. The conduct described herein occurred at Fidelity's sole office in Atlanta, Georgia where it employed between 24 to 30 registered representatives.
The Drucker Ponzi Scheme
2. In December 1997, Mark Drucker ("Drucker") opened a brokerage account (the "Account") at Fidelity. Beginning in June 1998 and continuing through the closing of the Account in September 1999 (the "relevant period"), Drucker operated a Ponzi scheme in which he deposited approximately $6.3 million of investor funds into the Account. He told investors that he would use their funds to buy and sell securities through a brokerage account at Fidelity in his name and under his management at Fidelity. In most cases, Drucker promised guaranteed returns of up to fifty (50%) percent in 90 days or less. In some instances, Drucker provided investors with agreements rolling over the original investment and purported profit. These agreements indicated a higher value of their investments than actually existed. Drucker's investment strategy consisted of day-trading options and equities in the Account using a momentum computer program.
3. Contrary to his promises to investors, Drucker consistently lost money from his trading. Through December 31, 1998, Drucker lost approximately $225,000 in the Account.
4. In 1999, Drucker's trading in the Account, in stock and options, increased substantially. Between December 1998 and July 1999, the annual turnover ratio increased from 22 to approximately 189. His trading losses increased as well. For the nine-month period from January 1, 1999 through September 30, 1999, net losses in the Account exceeded $630,000. The Account lost money every month in 1999 with the exceptions of January and March.
5. Despite the fact that Drucker was losing money in the Account, he paid more than $3.6 million to investors from the Account. In most instances, Drucker paid earlier investors from deposits into the Account from later investors. Drucker was dependent on new money from investors to keep his Ponzi scheme from crashing.
6. On September 14, 2000, the District Court permanently enjoined Drucker from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Court also ordered Drucker to disgorge the sum of $1,991,659.84 (which included prejudgment interest) and to pay a civil penalty of $110,000. See SEC v. Mark Drucker, Civil Action No. 1-99-CV-2687 (N.D. Ga.), Lit. Rel. No. 16335, 70 SEC Docket 2885 (Oct. 15, 1999).
7. Drucker's registered representative at Fidelity substantially assisted Drucker in furtherance of his Ponzi scheme by executing all the trades in the Account as well as by assisting Drucker in recruiting two investors to invest money in the Account in early June 1999.
Fidelity's Failure To Supervise
8. Fidelity failed reasonably to supervise Drucker's registered representative with a view to preventing violations of the securities laws because it had an inadequate system for implementing its compliance procedures. If the compliance procedures had been implemented adequately, Fidelity would have detected that Drucker's representative was substantially assisting Drucker's fraudulent activities by noting that Drucker was investing other people's money in the Account and that almost all of the funds in the Account came from such persons, that the Account had large changes in equity and that Drucker was writing checks out of the Account to persons who had previously deposited money into the Account.
9. Fidelity personnel were aware of Drucker's extraordinarily high trading volume and the huge losses that Drucker was incurring in the Account through day-trading equities and options. Firm personnel reviewed order tickets on a daily basis, reviewed commission runs on a monthly basis and compliance reports at least three times a year.
10. Commissions from the Account were approximately eight percent of the total commissions received by Fidelity during the period from October 1998 to September 1999. During this time, Fidelity serviced between 2,800 and 3,000 accounts. Commissions from the Account during this time amounted to one-third of Drucker's registered representative's Fidelity income.
11. Fidelity's procedures required that incoming customer correspondence be reviewed. Fidelity failed, however, to effectively implement this procedure so that responsibility for conducting such review was clearly delineated. Fidelity's procedures also required that monthly account statements be reviewed for "unusual deposits" and other "unusual activity." Fidelity, however, failed to adequately implement a system to make sure that such reviews actually occurred.
12. Because Fidelity failed to effectively implement these procedures, it failed to detect a pattern of unusual deposits and other unusual activity such as (a) that virtually none of the deposits into the Account were Drucker's money; (b) that several third-party checks were deposited into the Account contrary to Fidelity's policy; (c) that numerous checks containing notations such as "loan," "investment," "stock" or "agreement" were deposited into the Account; and (d) that Drucker wrote a number of checks from the Account to third parties who previously had written checks that were deposited into the Account. In addition, Fidelity failed to take action despite receiving during the first week of June 1999, correspondence from two of its customers instructing the firm to transfer all assets in their accounts at Fidelity to the Account. One of the letters stated that the purpose of the transfer was to have Drucker manage the customer's funds. Such correspondence was never effectively reviewed. Had Fidelity had an adequate system in place to detect this pattern of activity and take follow-up action in these areas, Fidelity would have detected Drucker's Ponzi scheme.
13. Because Fidelity failed effectively to implement its compliance procedures, it was unable to prevent and detect violations of the securities laws. In Consol. Inv. Serv., Inc., 1994 SEC LEXIS 4045 (Dec. 12, 1994) initial decision has become final, 1996 SEC LEXIS 83 (January 5, 1996) the Commission made it clear that simply creating procedures is not enough.
Establishment of policies and procedures alone is not sufficient to discharge supervisory responsibilities, however, as on-going monitoring and review is necessary to ensure that the established procedures, which make up the supervisory program, are effective in preventing and detecting violations.
14. Fidelity failed reasonably to supervise within the meaning of Section 15(b)(4)(E) of the Exchange Act because it failed to establish an adequate system to implement procedures reasonably designed to detect and prevent violations of the securities laws by Drucker's registered representative.
15. As a result of the conduct described above, Drucker's registered representative willfully aided and abetted Drucker's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.
16. As a result of the conduct described above, Fidelity failed reasonably to supervise Drucker's registered representative with a view toward preventing his willful aiding and abetting violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Undertakings
Respondent has voluntarily filed with the Commission a Form BDW seeking a full withdrawal from registration with the Commission, all Self-Regulatory Organizations and all jurisdictions. Respondent also filed with the Commission notification, pursuant to Exchange Act Rule 15b6-1(b), that it consents to delay the date the Form BDW becomes effective for purposes of the Order until no earlier than five (5) days after the Commission institutes the Order. Respondent further undertakes that it will not withdraw its Form BDW after it is filed. In determining whether to accept the Offer, the Commission has considered these undertakings.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Fidelity's Offer. Accordingly, it is hereby ORDERED:
A. Pursuant to Section 15(b)(4) of the Exchange Act, that Respondent is hereby censured;
B. IT IS FURTHER ORDERED that Respondent shall, within three (3) days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $50,000 and a civil money penalty in the amount of $75,000 for a total payment of $125,000 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 or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, , VA 22312; and (D) submitted under cover letter that identifies Fidelity as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Richard P. Murphy, Assistant District Administrator, Securities and Exchange Commission, Atlanta District Office, 3475 Lenox Road, N.E., Suite 1000, Atlanta, GA 30326-1232. Such civil monetary penalty may be distributed pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002 ("Fair Fund distribution"). Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid as civil monetary penalties pursuant to this Order shall be treated as penalties paid to the government for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees that it shall not, in any Related Investor Action, benefit from any offset or reduction of any investor's claim by the amount of any Fair Fund distribution to such investor in this proceeding that is proportionately attributable to the civil penalty paid by Respondent ("Penalty Offset"). If the court in any Related Investor Action grants such an offset or reduction, Respondent agrees that it shall, within 30 days after entry of a final order granting the offset or reduction, notify the Commission's counsel in this action and pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed against Respondent in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a private damages action brought against Respondent by or on behalf of one or more investors based on substantially the same facts as alleged in the Order in this proceeding.
By the Commission.
Secretary
Endnotes