Legg Mason Wood Walker, Inc., Thomas M. Daly, and Joseph Sullivan
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE
COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 44407 / June 11, 2001
ADMINISTRATIVE PROCEEDING
File No. 3-10068
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In the Matter of
Legg Mason Wood Walker, Incorporated
Respondents
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ORDER MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS, AND CEASE-AND- DESIST ORDER |
I.
In these proceedings instituted pursuant to Sections 15(b), 15B(c), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Respondents Legg Mason Wood Walker, Incorporated ("Legg Mason"), Thomas M. Daly, Jr. ("Daly") and Joseph A. Sullivan ("Sullivan") (collectively, the "Respondents") have submitted Offers of Settlement (the "Offers") which the Securities and Exchange Commission ("Commission") has determined to accept. Solely for the purpose of these proceedings 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 contained herein, except jurisdiction, which each Respondent admits, the Respondents, by their Offers, consent to the findings and the imposition of the sanctions and other relief contained in this Order Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order").
II.
On the basis of this Order and the Offers submitted by the Respondents, the Commission finds that:
A. Respondents
1. Legg Mason is a Maryland corporation registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act.
2. Daly is a Legg Mason Senior Vice President. From, at least, June 30, 1994 to April 18, 1997, Daly managed Legg Mason's municipal securities sales and trading and public finance functions.
3. Sullivan is a Legg Mason Senior Vice President. Since April 18, 1997, Sullivan managed Legg Mason's Fixed Income Department, including its municipal securities sales and trading function.
B. Background
1. From June 30, 1994 through June 30, 1998, Legg Mason was the senior-managing or sole underwriter in numerous primary offerings of municipal securities, including advance refundings.
2. At various times during the relevant time period, Legg Mason, Daly and, to a lesser extent, Sullivan, were given notice of increased attention to Municipal Securities Rulemaking Board ("MSRB") rule compliance and deficiencies in its MSRB rule compliance by both the NASD and, from, at least, September 1, 1998, the Commission, yet they continuously failed to effect full compliance with those rules. Moreover, during this time period, publications such as the Bond Buyer and the Wall Street Journal reported increased regulatory efforts in this regard.
3. MSRB Rule G-36(b)(i) requires, among other things, the managing underwriter in initial offerings of municipal securities subject to Exchange Act Rule 15c2-12 to send two copies of the official statement form ("Form OS") and the final official statement to the MSRB no later than ten business days after the final agreement to purchase. Rule G-36(b)(ii) further requires, among other things, the managing underwriter in advance refundings of outstanding issues of municipal securities to send two copies of the advance refunding documents form ("Form ARD") and the advance refunding documents to the MSRB within five business days of delivery of the securities by the issuer to the managing underwriter.
4. From, at least, June 30, 1994 to April 18, 1997, Daly supervised certain Legg Mason employees whose functions included sending prescribed forms and documents to the MSRB on behalf of Legg Mason to comply with MSRB Rule G-36.
5. From, at least, April 18, 1997 through February 1999, Sullivan supervised certain Legg Mason employees whose functions included sending prescribed forms and documents to the MSRB on behalf of Legg Mason to comply with MSRB Rule G-36.
6. MSRB Rule G-27 requires each broker, dealer and municipal securities dealer to supervise the conduct of its municipal securities business and the municipal securities activities of its associated persons, and to adopt, maintain and enforce written supervisory procedures reasonably designed to ensure compliance with the MSRB rules and the applicable provisions of the Exchange Act and rules thereunder (collectively, the "applicable rules").1 More specifically, MSRB Rule G-27(a) requires each broker, dealer and municipal securities dealer to supervise the conduct of its municipal securities business and the municipal securities activities of its associated persons to ensure compliance with the applicable rules. Subpart (b) requires the designation of principals to be responsible for such supervision, and the maintenance and updating of a written record of such designation, including the designated principal's responsibilities under Rule G-27. Subpart (c) requires the adoption, maintenance and enforcement of written supervisory procedures reasonably designed to ensure compliance with the applicable rules. In particular, Rule G-27(c) provides that such procedures should codify the dealer's supervisory system for ensuring compliance and should, at minimum, "establish procedures (i) that state how a designated principal shall monitor for compliance .... with all applicable rules; ... (iv) for the periodic review by a designated principal of each office which engages in municipal securities activities; [and] (v) for the maintenance and preservation, by a designated principal, of the books and records required to be maintained and preserved by rules G-8 and G-9 of the Board." Finally, subpart (e) imposes on the dealer the duty to revise and update written procedures as necessary to respond to changes in MSRB or other rules and as other circumstances require, to review annually its supervisory system and written supervisory procedures to determine whether they are adequate and up-to-date, and to ensure that the dealer is in compliance with Rule G-27.2
C. The Violations
1. With respect to Legg Mason's participation in advance refundings and initial offerings of municipal securities from June 30, 1994 through June 30, 1998, Legg Mason willfully3 violated MSRB Rules G-36(b)(i) and (ii) in that it failed to file, or filed delinquently, documents required to be filed under those rules. Legg Mason failed to file the required Form ARD for almost one quarter of the advance refunding transactions in which it acted as the managing underwriter during this four-year period.
2. From, at least, June 30, 1994 through April 18, 1997, Daly was a cause of Legg Mason's violations of MSRB Rules G-36(b)(i) and (ii) in that he knew or should have known of Legg Mason's Rule G-36 violations yet he did not cure those violations or otherwise ensure that Legg Mason complied with Rule G-36.
3. From, at least, April 18, 1997 through February 1999, Sullivan was a cause of Legg Mason's violations of MSRB Rules G-36(b)(i) and (ii) in that he knew or should have known of Legg Mason's Rule G-36 violations yet he did not cure those violations or otherwise ensure that Legg Mason complied with Rule G-36.
4. With respect to Legg Mason's participation in advance refundings and initial offerings of municipal securities during the relevant period, Legg Mason, Daly and Sullivan willfully violated MSRB Rule G-27(a) in that they failed to supervise the conduct of Legg Mason's municipal securities business and the municipal securities activities of its associated persons to ensure compliance with MSRB Rules G-36(b)(i) and (ii).
5. With respect to Legg Mason's participation in all offerings and transactions of municipal securities during the relevant period, Legg Mason further willfully violated MSRB Rules G-27(b), (c)(i), (c)(iv), (c)(v) and (e) in that it failed to designate principals responsible for supervision of its municipal securities business and the municipal securities activities of its associated persons as required by Rule G-27; failed to keep a written record of that supervisory designation and of the designated principal's responsibilities under Rule G-27; failed to adopt, maintain and enforce written supervisory procedures that (i) state how a designated principal shall monitor for compliance by the dealer with the applicable rules, (ii) provide for the periodic review by a designated principal of each office which engages in municipal securities activities, or (iii) provide for the maintenance and preservation, by a designated principal, of the books and records required to be maintained and preserved by MSRB Rules G-8 and G-9; failed to revise and update its written supervisory procedures as necessary to respond to changes in MSRB or other rules and as other circumstances require, or to review annually its supervisory system and written supervisory procedures to determine whether they are adequate and up-to-date; and failed to ensure that Legg Mason was in compliance with Rule G-27.
III.
On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions and other relief specified in the Respondents' Offers of Settlement.
Accordingly, IT IS HEREBY ORDERED that:
A. Legg Mason, Daly and Sullivan be, and hereby are, censured;
B. Daly and Sullivan cease and desist from committing or causing any violations and any future violations of MSRB Rules G-36(b)(i) and (ii) and Rule G-27(a) as it relates to Rule G-36;
C. Legg Mason cease and desist from committing or causing any violations and any future violations of MSRB Rules G-27(b), (c)(i), (c)(iv), (c)(v), (e) and G-36(b)(i) and (ii), as well as of Rule G-27(a) as it relates to Rule G-36;
D. Legg Mason shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $50,000 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 Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under a cover letter which identifies Legg Mason as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Ronald C. Long, District Administrator, Philadelphia District Office, Securities and Exchange Commission, The Curtis Center, Suite 1120E., 601 Walnut Street, Philadelphia, Pennsylvania 19106;
E. Daly shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $10,000 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 Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under a cover letter which identifies Daly as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Ronald C. Long, District Administrator, Philadelphia District Office, Securities and Exchange Commission, The Curtis Center, Suite 1120E., 601 Walnut Street, Philadelphia, Pennsylvania 19106;
F. Sullivan shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $10,000 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 Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under a cover letter which identifies Sullivan as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Ronald C. Long, District Administrator, Philadelphia District Office, Securities and Exchange Commission, The Curtis Center, Suite 1120E., 601 Walnut Street, Philadelphia, Pennsylvania 19106;
G. Legg Mason shall, within 1 year of the date of this Order, comply with its undertaking to retain, at Legg Mason's expense, an independent consultant, not unacceptable to the Commission's staff who shall, among other things, conduct a comprehensive review of Legg Mason's policies, procedures and practices relating to the prevention or detection of the improper conduct described in § II.C., above. Within 30 days of retention, the independent consultant shall review such policies, procedures and practices with respect to the improper conduct described in § II.C. with a view to determining if all such policies, procedures and practices have been implemented or require supplementation. Legg Mason shall cooperate with the independent consultant's review of Legg Mason's policies, procedures and practices, and shall provide the independent consultant with any and all requested documents that the independent consultant reasonably requests (other than materials or information protected by a valid claim of attorney-client privilege or attorney work product).
1. The independent consultant shall prepare a written report of findings and recommendations within 60 days of retention. Legg Mason shall be provided a reasonable opportunity to comment on the independent consultant's report, not to exceed 30 days after receipt of the independent consultant's report. With respect to any recommendation or proposal with which Legg Mason and the independent consultant do not agree, Legg Mason and the independent consultant shall attempt in good faith to reach agreement.
2. If the independent consultant concludes that all of Legg Mason's policies, procedures and practices relating to the prevention or detection of the improper conduct described in § II.C., above, have been implemented, the independent consultant shall inform Legg Mason and the Philadelphia District Office, Division of Enforcement of this conclusion in writing, and his or her responsibilities with respect to Legg Mason shall conclude. If the independent consultant does not conclude that all of Legg Mason's policies, procedures and practices with respect to the improper conduct described in § II.C. have been implemented, and/or makes additional recommendations to supplement existing policies, procedures and practices, he or she shall notify Legg Mason and the Philadelphia District Office, Division of Enforcement in writing of the policies, procedures and practices that have not been implemented and/or describe the additional recommendations. Legg Mason shall implement such policies, procedures and practices in a timely manner, but in any event no later than 3 months from the date of receiving notification from the independent consultant. By the same date, Legg Mason shall submit to the Philadelphia District Office an Affidavit detailing its efforts to implement the procedures discussed in the independent consultant's report and stating whether it has achieved compliance.
3. For good cause shown, and upon receipt of a timely application from the independent consultant or Legg Mason, the Philadelphia District Office may extend any of the procedural dates set above. Moreover, if, after a good faith attempt to reach agreement with the independent consultant, Legg Mason believes that implementing the independent consultant's recommended policies, procedures and practices is unnecessary, impractical, unduly burdensome and/or unreasonable, it may petition the Commission, with notice to the independent consultant and the Philadelphia District Office, Division of Enforcement, for relief from implementing such policies, procedures and practices.
4. For the period of engagement and for a period of 1 year from the completion of the engagement, the independent consultant shall not, without prior written consent of the Philadelphia District Office, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Legg Mason, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. Any firm with which the independent consultant is affiliated or of which he/she is a member, and any person engaged to assist the independent consultant in performance of his/her duties under this Order shall not, without prior written consent of the Philadelphia District Office, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Legg Mason, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of 1 year after the engagement.
By the Commission,
Jonathan G. Katz
Secretary
Footnotes
1 Rule D-11 defines the terms "broker," "dealer," and "municipal securities dealer," to include their respective associated persons, excluding clerical or ministerial staff.
2 Since the date of the institution of proceedings in this matter, the MSRB has amended Rule G-27, changing the subsection that deals with revising, reviewing and updating supervisory procedures from (d) to (e). The Commission approved the amendment on March 16, 2000, and it became effective on September 19, 2000.
3 In applying the term "willful" in Commission administrative proceedings instituted pursuant to Sections 15(b), 15B, 15C, 17A, and 19(h) of the Securities Exchange Act, the Commission evaluates on a case-by-case basis whether the respondent knew or reasonably should have known under the particular facts and circumstances that his conduct was improper. In this case, as in all Commission administrative proceedings charging a willful violation under these statutory provisions, the Commission applies this standard to persons-specifically industry professionals-who are directly subject to Commission jurisdiction and who have a responsibility to understand their duties to the investing public and to comply with the applicable rules and regulations which govern their behavior.