UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7655 / March 12, 1999 SECURITIES EXCHANGE ACT OF 1934 Release No. 41166 / March 12, 1999 ADMINISTRATIVE PROCEEDING File No. 3-9440 : In the Matter of : ORDER MAKING FINDINGS : AND IMPOSING REMEDIAL : SANCTIONS AND A CEASE- Larry E. Muller, : AND-DESIST ORDER Respondent. : : I. The Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Larry E. Muller ("Muller") on September 26, 1997. II. Respondent Muller has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this proceeding 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 herein, except as to the jurisdiction of the Commission over Respondent and over the subject matter of this proceeding and as to Section III.A., which is admitted, Respondent Muller by his Offer consents to the entry of findings and remedial sanctions set forth below. III. On the basis of this Order Making Findings and Imposing Remedial Sanctions And A Cease-And-Desist Order ("Order") and the Offer submitted by Respondent Muller the Commission finds[1] that: A. Larry E. Muller ("Muller") at all relevant times was a registered representative and trader associated with a certain broker-dealer (the "Broker-Dealer") in its Houston office. B. The Broker-Dealer's Houston office was opened in October 1990. The Houston office was established to sell fixed-income products, primarily mortgage-backed securities, to institutional clients. C. At all relevant times, the Houston office had the authority to execute riskless principal transactions. However, the Broker-Dealer did not allow the Houston office to hold positions in securities unless they received approval from the main office. D. Muller began a parking scheme in approximately October 1992. Initially, Muller parked securities directly with a registered representative with another broker- dealer (the "Parking Firm"). Following those transactions, the scheme changed slightly. From that point forward, whenever Respondent Muller wanted to park securities, he entered into an arrangement with the Parking Firm whereby the Broker-Dealer would sell the bonds to another dealer for settlement that month. That dealer would then sell the bonds to the Parking Firm for a fraction higher than it had purchased them from the Broker-Dealer. The Broker-Dealer would then repurchase the bonds from the Parking Firm for settlement the next month, with the Parking Firm earning a small profit on the transaction. Muller used the time between settlement dates to find a customer for the bonds. The parking scheme essentially allowed Muller an extra month to find a customer for securities over which he maintained control. E. On at least several occasions Muller used the parking scheme to manipulate the price of certain government agency securities and conceal undisclosed excessive markups charged to the Broker-Dealer customers. The excessive markups amounted to approximately $1.85 million. Muller received excessive compensation from these transactions of $225,148. F. In those instances, Muller purchased bonds and marked them up considerably on the sale to the other dealers. These dealers then marked up the securities another 1/32 or 2/32 when selling them to the Parking Firm. The Parking Firm then marked up the securities another 2/32 when selling them back to the Broker-Dealer. The Broker-Dealer, through Respondent Muller would then mark up the securities another 4%-5% when selling them to innocent, bona fide customers. G. Muller dictated the prices on the parking transactions. The other firms acquiesced in these price setting transactions. Therefore, the trades involving the other dealers were fictitious, non-bona fide transactions, and did not indicate or reflect the actual market value of those securities. H. As a result of the parking scheme described above, the Broker-Dealer maintained inaccurate books and records, insofar as, among other things, the firm's books and records did not reflect the liabilities arising from Muller's commitments to repurchase the securities involved, and contained incorrect valuations of the firm's positions. The firm also computed its net capital inaccurately and, in some instances, had undisclosed net capital deficiencies. Muller knowingly and substantially aided the Broker-Dealer's books and records and net capital violations by entering into the parking transactions. I. The parking scheme also caused the Broker-Dealer to file inaccurate FOCUS reports with the NASD, thereby presenting to regulators a misleading picture of the firm's net worth. Furthermore, the scheme caused the Broker-Dealer to fail to disclose to the Commission that the firm was in net capital violation on numerous occasions. J. Respondent Muller has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest or a civil money penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Muller and has determined that Muller does not have the financial ability to pay disgorgement of $225,148 plus prejudgment interest or a civil money penalty. K. As a result of the conduct described above, Muller willfully violated and committed violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and willfully aided and abetted and was a cause of the violations of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a-11, thereunder. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Muller and impose the remedial sanctions specified therein. Accordingly, IT IS ORDERED that Muller be and hereby is barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company; IT IS FURTHER ORDERED that Muller shall cease and desist from committing or causing any violations of, and any future violation of, Sections 17(a)(1), 17(a)(2) or 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violation and any future violation of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5 and 17a-11, thereunder. IT IS FURTHER ORDERED that Muller shall pay disgorgement of $225,148 plus prejudgment interest, but that payment of such amount be waived, and civil money penalties not be imposed against Muller, based on Muller's demonstrated financial inability to pay; and IT IS FURTHER ORDERED that the Division of Enforcement ("Division") may, at any time following 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; (2) determine the amount of disgorgement and prejudgment interest to be imposed; (3) determine the amount of civil penalties to be imposed; and (4) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by the Respondent was fraudulent, misleading, inaccurate or incomplete in any material respect and whether additional remedies should be imposed. Respondent may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: The findings herein are not binding on anyone other than Muller.