Eric J. Brown,
Matthew J. Collins, Kevin J. Walsh, Mark W. Wells, Exchange Act Rel. 66469,
February 27, 2012
The Commission upheld sanctions against three respondents in connection with
sales or supervision of sales of variable annuities. It dismissed the case
against one individual.
The Commission concluded that Brown fraudulently sold variable annuities after
having lost his state license to sell insurance products and to have effected
unauthorized transactions in customer accounts. In doing so he aided and
abetted violations of the books and records provisions by falsifying customer
account forms. He was barred from broker, dealer or adviser association and
ordered to: cease and desist, pay disgorgement, and a penalty of $560,000.
Collins was found to have failed to supervise Brown and aided and abetted books
and records violations by falsifying customer account forms. He was barred from
broker, dealer, or adviser association with a right to reapply after two years
and ordered to: cease and desist, pay disgorgement, and a penalty of $310,000.
Walsh was found to have committed fraud in connection with variable annuity
sales. He too was barred from broker, dealer, or adviser association and
ordered to: cease and desist; pay disgorgement, and a penalty of $255,000.
Respondent Wells was successful in his appeal. Although the ALJ found that
Wells had engaged in fraudulent variable annuity sales the Commission disagreed
and dismissed the case against him.
The ALJ's initial decision is here.
The discussion of penalties in this decision is of interest. First, the
penalties were applied on a per customer basis rather than for each individual
misrepresentation. Second, no penalties were imposed for conduct that occurred
before the five year statute of limitations. The Commission rejected the
Division of Enforcement's argument that such sales were part of a continuing
course of conduct. Third, the Commission lowered the penalties from third to
second tier as the actual customer losses were relatively small. This last
matter is of great significance as it appears that the the Commission now will
impose third tier penalties only when customers actually suffer significant
economic loss. The statute of course authorizes third tier penalties when there
are substantial investor losses or "significant risk of
substantial losses." The Commission seems to base its conclusion on the
fact that there were no substantial investor losses here and simply conflates
that with significant risk of loss. The opinion never explains why there was no
risk of greater loss by the customers - it simply concludes that this was so
without any meaningful discussion of the issue.
Read more commentary on SEC administrative
opinions at SEC
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