Bruce D. Oakes
Securities Exchange Act of 1934
Release No. 50743 / November 29, 2004
Accounting And Auditing Enforcement
Release No. . 2142 / November 29, 2004
Admin. Proc. File No. 3-11746
In the Matter of BRUCE D. OAKES, Respondent. |
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ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Bruce D. Oakes ("Respondent" or "Oakes").
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("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 Respondent and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C 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. Oakes, age 38, resides in Ballwin, Missouri. Oakes was the chief operating officer and registered financial operations principal ("FINOP") for Eisner Securities, Inc. ("ESI") from its inception in 1996 until it ceased conducting business in September 2001. Oakes also held the title of president from January 2001 until September 2001.
Related Individual and Entity
2. Joseph E. Erwin ("Erwin"), age 42, currently is incarcerated at the Eglin Federal Prison Camp in Florida. On January 23, 2001, in the United States District Court for the Southern District of Ohio, Eastern Division, Erwin pled guilty to one count of mail fraud (18 U.S.C. §1341) and one count of wire fraud (18 U.S.C. §1343) related to his misappropriation of ESI's customers' funds. Erwin subsequently was sentenced to ten years incarceration and ordered to make restitution of $2,013,404.15. From 1997 through September 2000, Erwin was a registered representative and branch manager for ESI.
3. ESI, formerly headquartered in St. Louis, Missouri, was registered with the Commission as a broker-dealer from May 15, 1996 until December 2, 2001. On September 26, 2001, ESI notified the Commission and the NASD that it was not in compliance with its $50,000 minimum net capital requirement and was ceasing operations immediately. On October 2, 2001, ESI filed a Form BDW with the Commission that voluntarily withdrew its registration as a broker-dealer. On October 30, 2001, ESI was placed in SIPC liquidation. On December 2, 2001, ESI's Form BDW became effective.
Facts
4. ESI was an introducing broker, carrying and clearing its customer accounts on a fully-disclosed basis through a clearing firm. ESI's clearing firm retained customer funds, generated statements for ESI's customers, and effectuated transactions in ESI's customers' accounts at the direction of ESI. ESI's minimum net capital requirement was $50,000.
5. In 1997, Oakes hired Erwin as a branch manager. Erwin joined ESI with a fully-functioning branch office in Columbus, Ohio. At the time Oakes hired Erwin, Oakes knew Erwin had a disciplinary history that included termination from a previous position for improper transfer of funds. However, Oakes did not place Erwin on heightened scrutiny. Instead, Oakes granted Erwin special access to ESI's clearing firm's computer system, which included the ability to change customer addresses. Erwin used his access to the clearing firm's computer to change customer addresses to addresses he controlled and then submitted check requests from the accounts. Erwin forged signatures on the checks he received and deposited the funds in accounts he controlled. Erwin generated and mailed fake statements to the customers.
6. In September 2000, Oakes terminated Erwin's association with ESI after discovering that Erwin had misappropriated approximately $2 million from at least 11 ESI customer accounts since being hired. By October 2000, ESI had created a spreadsheet of the exact amount misappropriated from each customer account, totaling approximately $2 million. Erwin's misappropriations represented more than 100% of ESI's total assets.
7. In November 2000, ESI sent letters to most, if not all, of the customers affected by Erwin's misappropriations promising to handle their claims directly by March 31, 2001 if the carrier of ESI's Errors and Omissions professional liability insurance policy ("E&O policy") had not paid the claims by then. ESI had a $1 million E&O policy. ESI's claim under that policy was denied in October 2000.
8. In December 2000, ESI, through counsel, sent letters to most, if not all, of the customers affected by Erwin's misappropriations identifying the exact amount of each customer's loss and saying that "[ESI] intends to restore your loss as promptly as possible." The December 2000 letters went on to offer to restore to the customers 50% of the amount misappropriated from their accounts, in cash, immediately, with the remaining 50% paid out over 18 months, with interest. At the time that ESI made these offers to repay its customers, ESI did not have sufficient reserves to pay the up-front 50% cash reimbursements.
9. From at least March through September 2001, ESI admitted the liability created by Erwin's misappropriations during merger negotiations with another broker-dealer. From the beginning of negotiations, ESI discussed establishing a $4 million "holdback" escrow fund to pay any settlements or judgments arising from Erwin's misappropriations or other litigation matters.
10. At all relevant times, Oakes knew the facts set forth in paragraphs 6 through 9 above.
ESI Failed to Include Erwin's Misappropriations as a Liability in its Net Capital Computations, Quarterly FOCUS Reports, and Books and Records
11. Paragraph 8 of Statement of Financial Accounting Standards No. 5 ("FAS 5") required ESI to accrue the amount misappropriated as a liability if it was probable that a liability had been incurred as a result of Erwin's misappropriations and if the amount of loss could be reasonably estimated. Under this analysis, it was probable that a liability had been incurred by ESI because Erwin was an ESI branch manager and he had stolen ESI's customers' funds using the special access that ESI granted him to the clearing firm's computer. Further, ESI never disputed its liability with the customers affected by Erwin's misappropriations. The amount of loss for Erwin's misappropriations also was estimated by at least October 2000 when ESI created a spreadsheet of the exact amount misappropriated from each customer account.
12. From at least October 2000 through September 2001, ESI did not include the liability owed to customers resulting from Erwin's misappropriations in ESI's net capital computations, and books and records. ESI also did not include the liability owed to customers resulting from Erwin's misappropriations in ESI's FOCUS reports filed with the National Association of Securities Dealers ("NASD") for the quarters ended December 31, 2000, March 31, 2001, and June 30, 2001. Oakes was responsible for reviewing and approving the filing of ESI's quarterly FOCUS reports with the NASD. Had ESI accrued Erwin's misappropriations as a liability between October 2000 and September 2001, then its net capital computations, books and records, and FOCUS reports would have reflected a net capital deficit ranging between $1.7 million and $2 million.
13. ESI also did not include the liability incurred as a result of Erwin's misappropriations in its audited financial statements for its fiscal year ended December 31, 2000, which were filed with the Commission on February 28, 2001 under Oakes' signature.
Oakes Established ESI's Compliance Policies, Procedures, and Practices that Allowed Erwin's Fraud
14. Oakes was in charge of compliance and was responsible for establishing ESI's supervisory policies, procedures, and practices. Oakes failed reasonably to supervise Erwin with a view toward detecting and/or preventing Erwin's violations of the federal securities laws by instituting an inadequate supervisory system at ESI as follows:
- ESI's policies and procedures did not contain provisions for supervision of branch managers. In practice, ESI did not have a supervisory structure for branch managers.
- ESI's policies and procedures did not provide for heightened supervision of registered representatives who had disciplinary histories. In practice, ESI did not supervise Erwin with a heightened degree of scrutiny.
- ESI's policies and procedures did not contain adequate provisions to detect and/or prevent Erwin's fraudulent use of his access to the clearing firm's computer system. For example, ESI's clearing firm provided ESI with online access to reports that would have revealed any address changes for ESI customer account numbers. Oakes knew this information was available online, but he did not review it, and he did not establish any policies or procedures to ensure that other ESI employees reviewed the information. Moreover, although ESI had a policy and procedure that required all customer address change requests be submitted in writing to ESI's home office with written confirmation sent to the customers' old addresses, ESI did not have a system to implement the policy and procedure. Consequently, no one at ESI sent customers written confirmation of address changes.
- ESI's policies and procedures did not provide for the verification of written customer signatures and ESI did not verify written customer signatures on documents that, among other things, involved disbursement of customer funds.
Legal Analysis
ESI's Net Capital Violations
15. From at least October 2000 through September 2001, ESI violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1. During this period, by use of the mails, or means or instrumentalities of interstate commerce, ESI effected transactions in, or induced or attempted to induce the purchase or sale of, securities (other than an exempted security (except a government security) or commercial paper, bankers' acceptances or commercial bills) in contravention of the rules and regulations prescribed by the Commission as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers. Rule 15c3-1, known as the "net capital rule," requires a broker-dealer to maintain a certain minimum ratio of net capital to aggregate indebtedness so that the broker-dealer's assets will be sufficiently liquid to enable it to meet all of its current obligations. From at least October 2000 through September 2001, ESI had a net capital deficit ranging between $1.7 and $2 million as a result of the liability created by Erwin's misappropriations.
ESI's Books and Records Violations
16. Section 17(a) of the Exchange Act and Rule 17a-3 thereunder require that every registered broker-dealer make and keep current books and records reflecting, among other things, all liabilities and the firm's net capital computations. Rule 17a-5 also requires that registered broker-dealers such as ESI file quarterly FOCUS reports with the NASD and annual audited financial statements with the Commission. Implicit in these provisions is the requirement that information contained in a required book or record be accurate.
17. From at least October 2000 through September 2001, ESI did not include the liability owed to customers resulting from Erwin's misappropriations in its net capital computations, and books and records. ESI also did not include the liability owed to customers resulting from Erwin's misappropriations in its FOCUS reports filed with the NASD for the quarters ended December 31, 2000, March 31, 2001, and June 30, 2001. ESI also filed with the Commission its audited financial statements for its fiscal year ended December 31, 2000, which failed to include a liability for Erwin's misappropriations. Had ESI accrued Erwin's misappropriations as a liability between October 2000 and September 2001, then its net capital computations, books and records, and FOCUS reports would have reflected a net capital deficit ranging between $1.7 million and $2 million. Accordingly, ESI violated Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-5 thereunder.
ESI's Notice Provision Violations
18. Section 17(a) of the Exchange Act and Rule 17a-11(b)(1) requires broker-dealers, like ESI, whose net capital declines below the minimum required pursuant to Rule 15c3-1 to give notice to the Commission of this fact, the same day. Rule 17a-11(d) also requires broker-dealers who fail to make or keep current books and records required by Rules 17a-3 to give notice to the Commission of this fact, the same day, specifying the books and records which have not been made or which are not current.
19. ESI failed to provide any notice or report to the Commission that it was out of compliance with its minimum net capital requirement and that it failed to keep current books and records from at least October 2000 through September 2001. Therefore, ESI violated Section 17(a) of the Exchange Act and Rule 17a-11 thereunder.
Oakes Caused ESI's Net Capital, Books and Records, and Notice Violations
20. Section 21C of the Exchange Act authorizes the Commission to bring a cease-and-desist proceeding against a person whose acts or omissions are a cause of an Exchange Act violation. Pursuant to Section 21C(a), a respondent is a cause of another's violation if he knew or should have known that his act would contribute to the violation. As described above, ESI violated Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5, and 17a-11 thereunder. Oakes knew or should have known that his conduct as described above would contribute to ESI's violations. Accordingly, based on the conduct described above, Oakes caused ESI's violations of Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5, and 17a-11 thereunder.
Oakes Failed Reasonably to Supervise Erwin
21. Section 15(b)(6)(A) of the Exchange Act provides that the Commission can impose various sanctions against individuals who fail reasonably to supervise others within the meaning of Section 15(b)(4)(E). Based on the conduct described above, Oakes failed reasonably to supervise Erwin with a view to detecting and/or preventing violations by Erwin of the federal securities laws.
Civil Penalties
Respondent has submitted a sworn Statement of Financial Condition dated November 6, 2003 and other evidence and has asserted his inability to pay a civil penalty.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED:
A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist from causing any violations and any future violations of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5, and 17a-11 thereunder;
B. Pursuant to Section 15(b)(6) of the Exchange Act Respondent be, and hereby is barred from association with any broker or dealer with the right to reapply for association in a non-supervisory capacity after two (2) years to the appropriate self-regulatory organization, or if there is none, to the Commission;
C. Any reapplication for association by the Respondent will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order;
D. Based upon Respondent's sworn representations in his Statement of Financial Condition dated November 3, 2003 and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent.
E. 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 Respondent 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 Respondent was fraudulent, misleading, inaccurate, or incomplete in any material respect. Respondent 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.
By the Commission.
Jonathan G. Katz
Secretary
Endnotes
Last Reviewed or Updated: June 27, 2023