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IN THE UNITED STATES DISTRICT COURT
COMPLAINT Plaintiff Securities and Exchange Commission (the "Commission") alleges as follows: SUMMARY 1. Wendell Duane Belden ("Belden") is the sole owner and control person of Southmark Advisory, Inc. ("Southmark"), a Commission-registered investment adviser, and Southmark, Inc. ("Southmark Broker"), a Commission-registered broker-dealer. 2. Since at least 1996, Belden has used these entities to defraud Southmark's predominantly elderly advisory clients by misleading them about their investment options and the security of their invested principal. 3. Since at least 1996, Belden, through Southmark and Southmark Broker, has also abused his discretionary authority to trade securities in advisory clients' accounts, by investing their money in a manner calculated to enrich Belden at the clients' expense. 4. Belden obtains advisory clients by advertising certificates of deposit ("CDs"), which are attractive to elderly investors and others who want safe investments. 5. When investors inquire about the CDs, however, Belden, along with other Southmark representatives whom Belden directs and supervises, aggressively pitches to the prospective clients a managed mutual fund account (the "Managed Account Program") in lieu of the advertised CDs. 6. Belden falsely tells the prospective clients that investments in equity-based mutual funds through the Managed Account Program are as safe as, or safer than, CDs, even though they generate higher returns than CDs. 7. Belden also leads the prospective clients to believe that Southmark will provide a personalized investment management service for each client's account; but in fact, all of Southmark's clients receive substantially the same investments. 8. When an investor enrolls as an advisory client of Southmark, Belden invests his new client's funds in "Broker Class" mutual fund shares ("B shares"), even though the clients are eligible to purchase other classes of mutual fund shares at a lower cost. 9. Belden fails to disclose in his sales pitch:
10. Belden has also affirmatively misrepresented his disciplinary history, by causing Southmark and Southmark Broker to file false Forms ADV and BD, respectively, with the Commission, and both firms have failed to amend their forms in order to disclose recent disciplinary sanctions against Belden. 11. Southmark recently stopped providing a market timing service that it had provided to its advisory clients previously, but neither Belden nor Southmark has disclosed the cessation of that service, even though Belden routinely pitched the market timing service to prospective clients as a critical feature of Southmark's purportedly personalized Managed Account Program. 12. Through this fraudulent scheme, the defendants have, from 1996 to the present, sold B shares worth at least $82,801,550, victimized at least 400 predominantly elderly or retired investors, and fraudulently earned at least $5,000,000 in advisory management fees and undisclosed brokerage commissions. 13. By reason of these activities, Defendants have engaged, are engaged, and will continue to engage, in acts and practices which constitute and will constitute violations of, or aiding and abetting violations of, Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)]; Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)], and Rules 10b-5 and 15b3-1 thereunder [17 C.F.R. §§ 240.10b-5 and 240.15b3-1]; and Sections 204, 206(1), 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 ("Advisers Act") [15 U.S.C. §§ 80b-4, 80b-6(1), 80b-6(2), 80b-6(4) and 80b-7] and Rules 204-1(a)(2), 206(4)-4(a)(2) and 206(4)-4(c) [17 C.F.R. §§ 275.204-1(a)(2), 275.206(4)-4(a)(2) and 275.206(4)-4(c)]. VENUE AND JURISDICTION 14. The Commission is an agency of the United States of America established by Section 4(a) of the Exchange Act [15 U.S.C. § 78d(a)]. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)], by Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)], and by Section 209(d) of the Advisers Act [15 U.S.C. § 80b-9]. 15. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], and Section 214 of the Advisers Act [15 U.S.C. § 80b-14]. 16. Certain of the acts, practices, courses of business, and transactions constituting violations of the Securities Act, the Exchange Act, and the Advisers Act, and rules thereunder, as alleged in this Complaint, have occurred within the Northern District of Oklahoma. The main office for Southmark, Southmark Broker, and Belden, from which the violative activities set out herein were conducted, and Belden's residence, are located in the Northern District of Oklahoma. DEFENDANTS 17. Wendell Duane Belden, age 63 and a resident of Tulsa, is the sole owner of Southmark and Southmark Broker. He dominates and controls the operations and policies of both entities. Belden is registered as an investment company products/variable contracts limited representative and an investment company products/variable contracts limited principal with Southmark Broker, a member firm of the National Association of Securities Dealers ("NASD"). 18. On August 29, 2002, the Administrator for the Oklahoma Department of Securities barred Belden from associating with an investment adviser subject to the Oklahoma Securities Act and fined him $50,000. 19. On August 13, 2002, the NASD suspended Belden from associating with any NASD member, in all capacities, for one year, and fined Belden $40,000 and ordered him to pay restitution of $55,567. 20. On September 27, 1993, the NASD accepted a consent judgment from Belden for violations of the NASD's Rules of Fair Practice and fined him $25,000. The NASD found that Belden distributed sales literature that had not been approved by his employer member firms and had not been filed with the NASD's advertising department. 21. Southmark Advisory, Inc. (f/k/a Southmark of Tulsa, Inc.) ("Southmark"), headquartered in Tulsa, is registered as an investment adviser with the Commission and is a "notice filer" with the Oklahoma Department of Securities. Southmark, which has approximately 14 employees, provides discretionary investment management services, primarily to retired individuals, through the firm's Managed Account Program. 22. Throughout the relevant period, that program consisted of investing clients' money in mutual funds and employing a market timing service to transfer the client money between money market funds and stock funds, within the same fund family, purportedly at advantageous times relative to changes in market prices. 23. Southmark receives a "management fee" of four percent each year from clients who participate in the Managed Account Program. As of September 17, 2002, Southmark had approximately 400 clients, with assets under management valued at approximately $26 million. 24. On August 29, 2002, the Administrator for the Oklahoma Department of Securities entered an order censuring Southmark and ordering it to cease and desist from violating certain provisions of the Oklahoma Securities Act. 25. Southmark, Inc. ("Southmark Broker"), which shares office space with Southmark, has been registered with the Commission as a broker-dealer since August 26, 1993. It has six registered representatives, all of whom are also employees of Southmark. 26. Southmark Broker derives all of its revenues from sales commissions (typically four percent of the amount initially invested in the Managed Account Program) and trail commissions (12b-1 fees) generated by Southmark's clients' investments. Its only source of business is the securities trading that it conducts on behalf of Southmark's clients. STATEMENT OF FACTS 27. Southmark advertises high-rate certificates of deposit ("CDs") in Tulsa's weekly newspaper and other area publications, and in the Tulsa yellow pages under the category, "banks." 28. Southmark does not, however, sell CDs or FDIC insured investments of any kind; nor does it generate revenue directly from investments in CDs. 29. When prospective investors, predominantly elderly and retired individuals, contact the firm regarding CDs, Southmark and Belden's regular practice is to attempt to persuade them to purchase mutual fund shares through the firm's "personalized" Managed Account Program. 30. As part of Southmark's standard sales pitch, Belden and other representatives customarily tell investors that mutual fund investments in the Managed Account Program are "as safe as" or "safer than" CDs. 31. The standard sales pitch also includes representations that the "market timing" service that Southmark provides through the Managed Account Program protects investors' principal and profits by shifting investor assets from a stock fund to a money market fund during downturns in stock prices. 32. When individuals agree to participate in the Managed Account Program, their funds are routinely invested by Southmark, at Belden's direction, in class B shares. 33. Belden and other Southmark representatives fail to inform the clients, however, that other classes of mutual fund shares, involving different costs and fees, are available from the mutual funds that Southmark offers through the Managed Account Program. 34. Most notably, Belden and other representatives fail to inform clients about the lower fees and charges that are associated with A shares, even though Southmark's clients are all eligible to purchases A shares. 35. Neither Belden nor anyone else associated with Southmark inquires about investors' preferences for a particular fee arrangement or class of shares. 36. Neither Belden nor anyone else associated with Southmark discloses that Southmark Broker receives a 4% commission upon the purchase of B shares for Southmark's advisory accounts. 37. In August 2002, Southmark stopped providing a market timing service to its clients, but neither Belden nor anyone else associated with Southmark has informed the advisory clients of the cessation of the service, even though (a) Southmark continues to charge the clients the same advisory fee rate that it charged when the timing service was in place, and (b) the timing service was the only "service" that Southmark actually performed for its clients - apart from placing them all in the same inappropriate mutual fund shares. 38. Southmark represents to prospective clients that it offers a "personalized management service," implying that Southmark will separately manage each investor's funds according to that investor's objectives and circumstances, but that is not, in fact, what Southmark does for its clients. 39. Southmark, at Belden's direction, handles each account within the Managed Account Program substantially the same as every other account in the program, and in fact provides no personalized management of the investors' funds. 40. The defendants have not informed clients and prospective clients of the several disciplinary actions brought against Southmark, Southmark Broker and Belden. 41. The defendants have also failed to amend their filings with the Commission to disclose recent disciplinary actions against them, which include a one-year suspension against Belden that prohibits him from participating in the brokerage business, and a permanent bar against Belden that prohibits him from participating in the advisory business in Oklahoma. 42. Southmark's primary source of revenue is its advisory fees, which are four percent per annum of the approximate $26 million assets under its management. This yields to Southmark approximately $1,040,000 per year. According to audited annual reports filed with the Commission, Southmark Broker's commissions from 1996 through 2002 averaged $473,151.71 per year. 43. While Belden does not receive a regular salary from either of the Southmark entities, he periodically pays himself by taking funds remaining in Southmark and Southmark Broker's bank accounts, after paying the companies' expenses. In the past 13 months he has received over $450,000. 44. In addition, it appears that Belden may have used the Southmark and Southmark Broker bank accounts to fund other business ventures in which he has a personal interest, and to pay certain personal expenses, including the construction of a residence and note payments on a condominium. FIRST CLAIM Violations of Section 17(a) the Securities Act 45. The allegations of paragraphs 1 through 44 of this Complaint are realleged and incorporated herein by reference. 46. Southmark, Southmark Broker and Belden, singly and in concert with others, directly and indirectly, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, have in the offer or sale of securities (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, practices or courses of business which operate or would operate as a fraud and deceit upon purchasers and prospective purchasers. 47. Southmark, Southmark Broker and Belden have intentionally, knowingly and/or recklessly engaged in the acts and practices described in this First Claim. 48. By reason of the foregoing, Southmark, Southmark Broker and Belden have violated, and unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]. SECOND CLAIM Violations of Section 10(b) of the Exchange Act
49. The allegations of paragraphs 1 through 44 of this Complaint are realleged and incorporated herein by reference. 50. Southmark, Southmark Broker and Belden, singly and in concert with others, directly and indirectly, by use of the means and instrumentalities of interstate commerce and by use of the mails, have in connection with the purchase or sale of securities (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, practices and courses of business which operate or would operate as a fraud and deceit upon one or more persons. 51. Southmark, Southmark Broker and Belden have intentionally, knowingly, and/or recklessly engaged in the acts and practices described in the Second Claim. 52. By reason of the foregoing, Southmark, Southmark Broker and Belden have violated, and unless enjoined, will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. THIRD CLAIM Violations of Rule 15b3-1 of the Exchange Act 53. The allegations of paragraphs 1 through 44 of this Complaint are realleged and incorporated herein by reference. 54. Southmark Broker has failed to file promptly, as required by Rule 15b3-1 under the Exchange Act, amendments to Form BD correcting information contained in an application by Southmark Broker for registration as a broker or dealer, after such information had become inaccurate. 55. By reason of the foregoing, Southmark Broker has violated, and unless enjoined, will continue to violate Rule 15b3-1 under the Exchange Act [17 C.F.R. § 240.15b3-1]. 56. Belden substantially assisted Southmark Broker's violations of Rule 15b3-1 under the Exchange Act, and did so knowingly or recklessly. 57. By reason of the foregoing, Belden has aided and abetted, and unless enjoined will continue to aid and abet, Southmark Broker's violations of Rule 15b3-1 under the Exchange Act. FOURTH CLAIM Violations of Section 204 of the Advisers Act and
58. The allegations of paragraphs 1 through 44 of this Complaint are realleged and incorporated herein by reference. 59. Southmark has failed to file an amendment on Form ADV (17 C.F.R. § 279.1), promptly updating information concerning disciplinary action against Southmark and Belden (including suspensions, expulsions or bars from membership in, or association with members of, a self-regulatory organization) that had become inaccurate, as required by Rule 204-1(a)(2) under the Advisers Act and the Instructions to Form ADV. 60. By reason of the foregoing, Southmark has violated, and unless enjoined, will continue to violate Section 204 of the Advisers Act and Rule 204-1(a)(2) thereunder [17 C.F.R. §275.204-1(a)(2)]. 61. Belden substantially assisted Southmark's violations of Section 204 of the Advisers Act and Rule 204-1(a)(2) thereunder, and did so knowingly or recklessly. 62. By reason of the foregoing, Belden has aided and abetted, and unless enjoined, will continue to aid and abet, Southmark's violations of Section 204 of the Advisers Act and Rule 204-1(a)(2) thereunder. FIFTH CLAIM Violations of Sections 206(1), (2) and (4) of the Advisers Act and
63. The allegations of paragraphs 1 through 44 of this Complaint are realleged and incorporated herein by reference. 64. Southmark is an investment adviser as defined by Section 202(a)(11) of the Adviser's Act [15 U.S.C. §80b-2(a)(11)]. 65. Southmark, singly and in concert with others, directly and indirectly, in connection with the purchase or sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails (a) employed devices, schemes and artifices to defraud clients and prospective clients; (b) engaged in transactions, practices, and courses of business which operated as a fraud or deceit upon clients and prospective clients; and (c) and engaged in acts, practices, or courses of business which are fraudulent, deceptive, or manipulative. 66. Southmark, singly, and in concert with others, directly and indirectly, in connection with the purchase or sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails, failed to disclose to clients and prospective clients, as required by Rule 206(4)-4(a)(2) under the Advisers Act, material facts with respect to a legal or disciplinary event that is material to an evaluation of Southmark's integrity or ability to meet contractual commitments to clients. 67. In the alternative, Southmark failed to disclose the facts required by Rule 206(4)-4(a)(2) under the Advisers Act to clients promptly, and to prospective clients not later than (i) 48 hours prior to entering into any investment advisory contract, or (ii) the time of entering into any such contract that the client has the right to terminate without penalty within five business days, as required by Rule 206(4)-4(c) under the Advisers Act. 68. Southmark has intentionally, knowingly and/or recklessly engaged in the acts and practices described in this Fifth Claim. 69. By reason of the foregoing, Southmark has violated, and unless enjoined, will continue to violate Sections 206(1), (2) and (4) of the Advisers Act [15 U.S.C. § 80b-6(2)] and Rules 206(4)-4(a)(2) and 206(4)-4(c) thereunder [17 C.F.R. § 275.206(4)-4(a)(2) and § 275.206(4)-4(c)]. 70. Belden substantially assisted Southmark's violations of Sections 206(1), (2) and (4) of the Advisers Act [15 U.S.C. § 80b-6(2)] and Rules 206(4)-4(a)(2) and 206(4)-4(c) thereunder [17 C.F.R. § 275.206(4)-4(a)(2) and § 275.206(4)-4(c)], and did so knowingly or recklessly. 71. By reason of the foregoing, Belden has aided and abetted, and unless enjoined, will continue to aid and abet, Southmark's violations of Sections 206(1), (2) and (4) of the Advisers Act [15 U.S.C. § 80b-6(2)] and Rules 206(4)-4(a)(2) and 206(4)-4(c) thereunder [17 C.F.R. § 275.206(4)-4(a)(2) and § 275.206(4)-4(c)]. SIXTH CLAIM Violations of Section 207 of the Advisers Act 72. The allegations of paragraphs 1 through 44 of this Complaint are realleged and incorporated herein by reference. 73. Southmark and Belden, singly and in concert with others, directly and indirectly, have willfully made untrue statements of material facts in registration applications or reports filed with the Commission under Section 203 or 204 of the Advisers Act, or willfully omitted to state in such applications or reports material facts which are required to be stated therein. 74. By reason of the foregoing, Southmark and Belden have violated, and unless enjoined, will continue to violate the provisions of Section 207 of the Advisers Act [15 U.S.C. § 80b-7]. 75. In the alternative, Belden has substantially assisted Southmark's violations of Section 207 of the Advisers Act, and has done so knowingly or recklessly; and by reason of that conduct, Belden has aided and abetted, and unless enjoined will continue to aid and abet Southmark's violations of Section 207 of the Advisers Act. RELIEF REQUESTED I. Preliminarily and permanently enjoin Southmark, its agents, servants, employees, attorneys and all persons in active concert or participation with it who receive actual notice of the injunction by personal service or otherwise, from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act, and Rules 204-1(a)(2), 206(4)-4(a)(2), and 206(4)-4(c) thereunder. II. Preliminarily and permanently enjoin Southmark Broker, its agents, servants, employees, attorneys and all persons in active concert or participation with it who receive actual notice of the injunction by personal service or otherwise, from future violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rules 10b-5 and 15b3-1 thereunder. III. Preliminarily and permanently enjoin Belden, his agents, servants, employees, attorneys and all persons in active concert or participation with him who receive actual notice of the injunction by personal service or otherwise, from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 207 of the Advisers Act, and from aiding and abetting in the future Southmark's violations of Sections 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rules 204-1(a)(2), 206(4)-4(a)(2), 206(4)-4(c) thereunder, and Southmark Broker's violations of Rule 15b3-1 under the Exchange Act. IV. Order each of the Defendants to disgorge an amount equal to the funds and benefits they obtained illegally as a result of the violations alleged, plus prejudgment interest on that amount. VI. Order each of the Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)], Section 21(d) of the Exchange Act [15 U.S.C. § 79u(d)], and Section 209(e) [15 U.S.C. § 80b-9] of the Advisers Act, for the violations alleged herein. VII. Order instanter that the Defendants' assets be frozen, pending a showing to the Court that they have sufficient funds or assets to satisfy all claims arising from the violations of the federal securities laws alleged in this Complaint. VIII. Order instanter that the Defendants prepare and file with the Court and serve on the Commission an accounting, under oath, detailing all funds, securities or other assets received, directly and indirectly, from the activities alleged herein, as well as the disposition of same by the Defendants or persons or entities under their control. IX. Order instanter that the Defendants be restrained and enjoined from destroying, removing, mutilating, altering, concealing or disposing of, in any manner, any of their books and records or documents relating to the matter set forth herein, or the books and records and documents of any entities under their control, until further order of the Court. X. Order instanter the appointment of a receiver to marshal, conserve, protect and hold funds and assets held or obtained by Southmark, Southmark Broker and Belden, wherever such assets may be found, or, with the approval of the Court, dispose of any wasting asset in accordance with the application and proposed order provided herewith. XI. Order such further relief, both equitable and legal, including interim relief, as this Court may deem just and proper. October , 2002 Respectfully submitted,
Of Counsel:
__________________________
http://www.sec.gov/litigation/complaints/comp17818.htm
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