In re JAMES X. McCARTY
summary
James X. McCarty failed to reasonably supervise Bradford C. Bleidt for a decade, enabling Bleidt’s $31 million fraud involving fake investments and misappropriated client funds, resulting in McCarty’s SEC bar from supervisory roles, a $50,000 civil penalty, and $1 disgorgement.
paragraph
James X. McCarty, a registered supervisor from 1994 to 2004, was found by the SEC to have failed reasonably to supervise Bradford C. Bleidt, who defrauded over 100 clients of more than $31 million by falsely representing that client funds were invested when they were instead misappropriated for personal use. McCarty ignored multiple red flags, including unreviewed client checks, skipped mandatory audits, and Bleidt’s unexplained wealth and funding of unrelated businesses, violating Sections 15(b) and 203(f) of the Exchange and Advisers Acts. As part of a settled administrative order, McCarty was barred from any supervisory role in the securities industry, ordered to pay a $50,000 civil penalty and $1 in disgorgement, with funds directed to a Fair Fund for victims.
narrative
James X. McCarty, a registered supervisor from June 1994 to November 2004, failed to reasonably supervise Bradford C. Bleidt, a registered representative who defrauded over 100 clients of more than $31 million between 1991 and 2004 by falsely claiming their funds were invested in securities when they were instead diverted to Bleidt’s personal accounts. Bleidt misled clients into liquidating brokerage accounts and sending checks or wires to his independent advisory firm, APAM, which he controlled, using the funds for personal expenses, a radio station, and other businesses. McCarty ignored numerous red flags, including unreviewed incoming client checks, failure to conduct mandatory annual audits, and Bleidt’s unexplained wealth and financial irregularities, despite having supervisory responsibility under firm policies. The SEC found McCarty in violation of Section 15(b)(6) of the Securities Exchange Act and Section 203(f) of the Investment Advisers Act for his supervisory failures, which enabled Bleidt’s long-running fraud. In a settled administrative order, McCarty consented to being barred from any supervisory role in the securities industry, paying a $50,000 civil penalty, and disgorging $1, with all payments directed to a Fair Fund established under the Sarbanes-Oxley Act for victim compensation. McCarty is also prohibited from benefiting from any penalty offset in related private investor actions, and if such an offset occurs, he must pay the full amount to the U.S. Treasury or Fair Fund without reducing his original penalty. Bleidt was later convicted of mail fraud and money laundering in 2005 and sentenced to over 11 years in prison.
Classified investment-adviser-fraud(confidence 100%). EDGAR detection: forms ADV/ADV-E/ADV-W/Form D· recall 33% / precision 13%. detection rule →
Statutes
Parties
bradford c. bleidtfederal securities lawsjames x. mccartySecurities and Exchange Commission
Keywords
bleidtrespondentmccartycommissionsecuritiesorderexchangesecurities exchangecommonwealthinvestmentcommonwealth dmfgdmfgexchange commissionentry orderinvestment advisory
Extracted insights
Dollar amounts 4
- $31.00M $31 million $10M–$100M
- $50K $50,000 $10K–$100K
- $20K $20,001 $10K–$100K
- $8K $7,500 <$10K
Entities 4
- person bradford c. bleidt
- person federal securities laws
- person james x. mccarty
- agency Securities and Exchange Commission
Triples 9
- James X. McCarty failed to supervise Bradford C. Bleidt
- Bradford C. Bleidt defrauded more than 50 brokerage customers
- Bradford C. Bleidt violated federal securities laws
- James X. McCarty supervised Bradford C. Bleidt from June 1994 to November 12, 2004
- Bradford C. Bleidt was registered representative with Commonwealth Equity Services, Inc. from January 18, 1991 to October 9, 2001
- Bradford C. Bleidt was registered representative with Detwiler, Mitchell, Fenton & Graves, Inc. from October 9, 2001 to February 12, 2004
- Bradford C. Bleidt was registered representative with Winslow, Evans & Crocker from February 12, 2004 to November 12, 2004
- SEC filed civil injunctive action against Bradford C. Bleidt and Allocation Plus Asset Management Company, Inc. on November 12, 2004
- Bradford C. Bleidt defrauded investment advisory clients of millions of dollars
PDF
Text layers
Extracted body text (16,477c)
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 56364 / September 6, 2007
INVESTMENT ADVISERS ACT OF 1940
Release No. 2644 / September 6, 2007
ADMINISTRATIVE PROCEEDING
File No. 3-12751
In the Matter of
JAMES X. McCARTY,
Respondent.
ORDER INSTITUTING ADMINISTRATIVE
PROCEEDINGS, MAKING FINDINGS, AND
IMPOSING REMEDIAL SANCTIONS
PURSUANT TO SECTION 15(b) OF THE
SECURITIES EXCHANGE ACT OF 1934
AND SECTION 203(f) OF THE
INVESTMENT ADVISERS ACT OF 1940
I.
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
public interest that public administrative proceedings be, and hereby are, instituted pursuant to
Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 203(f) of the
Investment Advisers Act of 1940 (“Advisers Act”) against James X. McCarty (“McCarty” or
“Respondent”).
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer
of Settlement (the “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, which are admitted, Respondent consents to the entry of this Order Instituting
Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to
Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment
Advisers Act of 1940 (“Order”), as set forth below.
2
III.
On the basis of this Order and Respondent’s Offer, the Commission finds
1
that:
Summary
1. Respondent failed reasonably to supervise Bradford C. Bleidt (“Bleidt”) with a view
to preventing and detecting his violations of the federal securities laws during the ten-year period
that McCarty supervised Bleidt as a registered representative of various broker-dealers. During this
time period, Bleidt defrauded more than 50 brokerage customers by lying about purchases and sales
of securities, misappropriating funds, and sending them falsified statements relating to their
investment advisory accounts with Bleidt’s independent advisory firm.
2
Respondent
2. James X. McCarty, age 65, resides in South Dennis, Massachusetts. He was
Bleidt’s immediate supervisor from at least June 1994 until November 12, 2004. McCarty holds
Series 40 and Series 63 securities licenses and has no disciplinary history.
Other Relevant Person
3. Bleidt, age 53, was a registered representative who worked in a Boston,
Massachusetts Office of Supervisory Jurisdiction (“OSJ”) and was associated with Commonwealth
Equity Services, Inc. d/b/a Commonwealth Financial Network (“Commonwealth”) from January
18, 1991 until October 9, 2001; with Detwiler, Mitchell, Fenton & Graves, Inc. (“DMFG”) from
October 9, 2001 to February 12, 2004; and with Winslow, Evans & Crocker (“WEC”) from
February 12, 2004 to November 12, 2004. Commonwealth has been dually registered as an
investment adviser since 1992.
4. On November 12, 2004, the Commission filed a civil injunctive action in the United
States District Court for the District of Massachusetts against Bleidt and his investment advisory
firm, Allocation Plus Asset Management Company, Inc. (“APAM”), alleging that Bleidt defrauded
his investment advisory clients of millions of dollars by leading them to believe their money was
invested when in fact he was misappropriating it for his own personal benefit. Many of Bleidt’s
advisory clients also maintained brokerage accounts with Commonwealth, DMFG, and/or WEC.
1
The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding
on any other person or entity in this or any other proceeding.
2
During the same time period, Bleidt defrauded at least another 50 victims, who did not have brokerage
accounts, but from whom Bleidt received funds directly in the form of a personal check or wire to Bleidt’s
independent advisory firm.
3
5. On July 26, 2005, Bleidt pled guilty to federal charges of mail fraud and money
laundering in connection with his fraudulent conduct. On December 5, 2005, Bleidt was sentenced
to over 11 years of confinement.
Bleidt’s Misconduct
6. From 1991 until November 2004, Bleidt misappropriated over $31 million from
more than 100 victims, many of whom had brokerage accounts at one or more of three broker-
dealers. To perpetrate these misappropriations, he asked his customers to request full or partial
liquidation of their existing brokerage accounts, and then to write a personal check (or in some
cases, send a wire) for the amount liquidated to his investment advisory company, APAM, which
did business at the same address as the OSJ. Bleidt falsely represented to these customers that their
money would continue to be invested in securities when, in fact, he misappropriated their funds.
Bleidt then deposited these funds into an APAM bank account, of which he had sole control.
Bleidt used funds from this APAM account for various business enterprises, including operating a
Boston radio station, as well as APAM and a related financial planning firm he also owned,
Financial Perspectives Planning Services, Inc. (“FPPS”). He also used the customers’
misappropriated funds to pay personal expenses such as his children’s high school and college
tuition. In some instances during the final years of the fraud, Bleidt induced prospective and
current investors to give him funds to open or add to an APAM account and simply
misappropriated the funds.
7. To further conceal his misappropriations and false representations, Bleidt created
and sent defrauded investors falsified performance reports in the name of APAM that vastly
overstated the actual value of the accounts, reflected holdings that did not exist, and reflected
purchases and sales of securities that he claimed to have made, but never did.
8. As a result of the conduct described above, Bleidt, during the period that he was
associated with Commonwealth, DMFG, and WEC, willfully violated Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with
the purchase or sale of securities.
Respondent’s Failure to Supervise
9. While Bleidt was a registered representative associated with Commonwealth,
DMFG, and WEC, he also owned the independent office in Boston at which the brokerage firms
each established an OSJ.
Failure to Respond to Red Flags Regarding Bleidt’s Financial Situation
10. While under Respondent’s supervision at all three broker-dealers, Bleidt was
pursuing other business interests. Respondent was aware that he conducted outside business
activities, including two investment advisory businesses and ownership in a radio station.
Respondent also was aware that one of the investment advisory businesses, FPPS, was not
profitable and that Bleidt was providing cash infusions to keep it afloat. These cash infusions
4
from Bleidt to FPPS and Bleidt’s outlay of funds for his radio station activities and ownership
were misappropriated funds. McCarty accepted Bleidt’s explanation that the source of his
money was a “trust fund,” without any evidence of the existence of the trust fund and the dollar
amounts therein. As Bleidt’s supervisor, McCarty was responsible for conducting further
investigation into whether Bleidt was violating the securities laws when such “red flags”
appeared. McCarty did not discharge his supervisory duties and failed to investigate the red
flags presented by Bleidt’s ability to fund significant cash requirements and willingness to fund a
losing business. If Respondent had investigated these red flags, it is likely that he could have
prevented or detected the fraud.
Failure to Follow Written Procedures at DMFG Regarding Opening and Review of
Incoming Mail
11. Incoming mail at the OSJ was sorted – unopened and unreviewed – into registered
representatives’ mailboxes during the entire time that McCarty supervised Bleidt. The lack of
review of incoming mail enabled Bleidt to receive checks and related correspondence from
Respondent’s customers who had liquidated their brokerage accounts. These checks were
typically in amounts mirroring the amounts liquidated and were sent to Bleidt for the purpose of
continuing to invest in securities. McCarty did not follow DMFG’s written supervisory
procedures for the opening and review of incoming mail, which required central mail opening at
the OSJ. Numerous suspicious checks and correspondence arrived at Bleidt’s office throughout
the entire period of his fraud. Had McCarty followed DMFG’s policy of reviewing all incoming
mail, he would have encountered one or more “red flag” pieces of mail and it is likely that he
could have prevented or detected the fraud.
Failure to Follow Written Procedures at Commonwealth and DMFG Regarding Annual
Audits of Registered Representatives
12. McCarty was not conducting the formal annual audits of each registered
representative required by Commonwealth’s and DMFG’s written supervisory procedures, which
involved an interview of the representative and a review of certain books and records.
Commonwealth’s written procedures dictated that McCarty was to audit each individual
representative annually using a checklist, and then Commonwealth was to review those
inspections during its own audit of the OSJ. Similarly, DMFG’s written procedures required
annual interviews of each representative and/or an inspection of certain books and records. Had
McCarty conducted the formal audits required by Commonwealth’s and DMFG’s procedures, it
is likely that he would have uncovered evidence of Bleidt’s misconduct and could have
prevented or detected the fraud.
Conclusions
13. Section 15(b)(6) of the Exchange Act, incorporating by reference Section
15(b)(4)(E) of the Exchange Act, authorizes the Commission to sanction a person who is
associated, or at the time of the alleged misconduct was associated, with a broker or dealer for
5
failing reasonably to supervise, with a view to preventing violations of the federal securities law,
another person who commits such a violation, if that person is subject to the person’s supervision.
McCarty was responsible for supervising Bleidt. Similarly, Section 203(f) of the Advisers Act,
incorporating by reference Section 203(e)(6) of the Advisers Act, authorizes the Commission to
sanction a person who is associated, or at the time of the alleged misconduct was associated, with
an investment adviser for failing reasonably to supervise, with a view to preventing violations of
the federal securities law, another person who commits such a violation, if that person is subject to
the person’s supervision.
14. Because Bleidt violated Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, and McCarty failed to adequately investigate red flags of Bleidt’s fraud and failed to
follow Commonwealth’s and DMFG’s written supervisory procedures, McCarty failed reasonably
to supervise Bleidt within the meaning of Section 15(b)(6) of the Exchange Act, incorporating by
reference Section 15(b)(4)(E) of the Exchange Act, and within the meaning of Section 203(f) of
the Advisers Act, incorporating by reference Section 203(e)(6) of the Advisers Act.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to
impose the sanctions agreed to in Respondent McCarty’s Offer.
Accordingly, pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the
Advisers Act, it is hereby ORDERED that:
A. Respondent McCarty be, and hereby is, barred from association in a supervisory
capacity with any broker, dealer, or investment adviser.
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.
B. It is further ordered that Respondent shall pay disgorgement of $1 and a civil
money penalty in the amount of $50,000 to the Securities and Exchange Commission, on the
following schedule:
(a) within ten days of the entry of the Order, a payment of $20,001;
(b) within 90 days of entry of the Order, a payment of $7,500;
(c) within 180 days of entry of the Order, a payment of $7,500;
(d) within 270 days of entry of the Order, a payment of $7,500;
6
(e) within 360 days of entry of the Order, a payment of $7,500;
Such payments 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 Office of Financial Management, Securities and
Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA
22312; and (D) submitted under cover letter that identifies McCarty as a Respondent in these
proceedings, the file number of these proceedings, a copy of which cover letter and money order or
check shall be sent to David P. Bergers, Regional Director, Securities and Exchange Commission,
33 Arch Street, 23
rd
Floor, Boston, Massachusetts 02110.
C. It is further ordered that the disgorgement and penalties referenced in paragraph B
above shall be paid into the Fair Fund created pursuant to Section 308(a) of the Sarbanes-Oxley
Act of 2002 in In the Matter of Commonwealth Equity Services, LLP d/b/a Commonwealth
Financial Network, Administrative Proceeding File No. 3-12749 (34-56362). Regardless of
whether any such Fair Fund distribution is made, amounts ordered to be paid as civil money
penalties pursuant to this Order shall be treated as penalties paid to the government for all
purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty,
Respondent agrees that he shall not, after offset or reduction in any Related Investor Action based
on Respondent’s payment of disgorgement in this action, argue that he is entitled to, nor shall he
further benefit by offset or reduction of any part of Respondent’s payment of a civil penalty in this
action ("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty Offset,
Respondent agrees that he shall, within 30 days after entry of a final order granting the Penalty
Offset, notify the Commission's counsel in this action and pay the amount of the Penalty Offset to
the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not
be deemed an additional civil penalty and shall not be deemed to change the amount of the civil
penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action"
means a private damages action brought against Respondent by or on behalf of one or more
investors based on substantially the same facts as alleged in the Order instituted by the
Commission in this proceeding.
By the Commission.
Nancy M. Morris
Secretary OCR text (16,363c · tika · 95% conf)
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 56364 / September 6, 2007
INVESTMENT ADVISERS ACT OF 1940
Release No. 2644 / September 6, 2007
ADMINISTRATIVE PROCEEDING
File No. 3-12751
In the Matter of
JAMES X. McCARTY,
Respondent.
ORDER INSTITUTING ADMINISTRATIVE
PROCEEDINGS, MAKING FINDINGS, AND
IMPOSING REMEDIAL SANCTIONS
PURSUANT TO SECTION 15(b) OF THE
SECURITIES EXCHANGE ACT OF 1934
AND SECTION 203(f) OF THE
INVESTMENT ADVISERS ACT OF 1940
I.
The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
public interest that public administrative proceedings be, and hereby are, instituted pursuant to
Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 203(f) of the
Investment Advisers Act of 1940 (“Advisers Act”) against James X. McCarty (“McCarty” or
“Respondent”).
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer
of Settlement (the “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, which are admitted, Respondent consents to the entry of this Order Instituting
Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to
Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment
Advisers Act of 1940 (“Order”), as set forth below.
2
III.
On the basis of this Order and Respondent’s Offer, the Commission finds1 that:
Summary
1. Respondent failed reasonably to supervise Bradford C. Bleidt (“Bleidt”) with a view
to preventing and detecting his violations of the federal securities laws during the ten-year period
that McCarty supervised Bleidt as a registered representative of various broker-dealers. During this
time period, Bleidt defrauded more than 50 brokerage customers by lying about purchases and sales
of securities, misappropriating funds, and sending them falsified statements relating to their
investment advisory accounts with Bleidt’s independent advisory firm.2
Respondent
2. James X. McCarty, age 65, resides in South Dennis, Massachusetts. He was
Bleidt’s immediate supervisor from at least June 1994 until November 12, 2004. McCarty holds
Series 40 and Series 63 securities licenses and has no disciplinary history.
Other Relevant Person
3. Bleidt, age 53, was a registered representative who worked in a Boston,
Massachusetts Office of Supervisory Jurisdiction (“OSJ”) and was associated with Commonwealth
Equity Services, Inc. d/b/a Commonwealth Financial Network (“Commonwealth”) from January
18, 1991 until October 9, 2001; with Detwiler, Mitchell, Fenton & Graves, Inc. (“DMFG”) from
October 9, 2001 to February 12, 2004; and with Winslow, Evans & Crocker (“WEC”) from
February 12, 2004 to November 12, 2004. Commonwealth has been dually registered as an
investment adviser since 1992.
4. On November 12, 2004, the Commission filed a civil injunctive action in the United
States District Court for the District of Massachusetts against Bleidt and his investment advisory
firm, Allocation Plus Asset Management Company, Inc. (“APAM”), alleging that Bleidt defrauded
his investment advisory clients of millions of dollars by leading them to believe their money was
invested when in fact he was misappropriating it for his own personal benefit. Many of Bleidt’s
advisory clients also maintained brokerage accounts with Commonwealth, DMFG, and/or WEC.
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding
on any other person or entity in this or any other proceeding.
2 During the same time period, Bleidt defrauded at least another 50 victims, who did not have brokerage
accounts, but from whom Bleidt received funds directly in the form of a personal check or wire to Bleidt’s
independent advisory firm.
3
5. On July 26, 2005, Bleidt pled guilty to federal charges of mail fraud and money
laundering in connection with his fraudulent conduct. On December 5, 2005, Bleidt was sentenced
to over 11 years of confinement.
Bleidt’s Misconduct
6. From 1991 until November 2004, Bleidt misappropriated over $31 million from
more than 100 victims, many of whom had brokerage accounts at one or more of three broker-
dealers. To perpetrate these misappropriations, he asked his customers to request full or partial
liquidation of their existing brokerage accounts, and then to write a personal check (or in some
cases, send a wire) for the amount liquidated to his investment advisory company, APAM, which
did business at the same address as the OSJ. Bleidt falsely represented to these customers that their
money would continue to be invested in securities when, in fact, he misappropriated their funds.
Bleidt then deposited these funds into an APAM bank account, of which he had sole control.
Bleidt used funds from this APAM account for various business enterprises, including operating a
Boston radio station, as well as APAM and a related financial planning firm he also owned,
Financial Perspectives Planning Services, Inc. (“FPPS”). He also used the customers’
misappropriated funds to pay personal expenses such as his children’s high school and college
tuition. In some instances during the final years of the fraud, Bleidt induced prospective and
current investors to give him funds to open or add to an APAM account and simply
misappropriated the funds.
7. To further conceal his misappropriations and false representations, Bleidt created
and sent defrauded investors falsified performance reports in the name of APAM that vastly
overstated the actual value of the accounts, reflected holdings that did not exist, and reflected
purchases and sales of securities that he claimed to have made, but never did.
8. As a result of the conduct described above, Bleidt, during the period that he was
associated with Commonwealth, DMFG, and WEC, willfully violated Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with
the purchase or sale of securities.
Respondent’s Failure to Supervise
9. While Bleidt was a registered representative associated with Commonwealth,
DMFG, and WEC, he also owned the independent office in Boston at which the brokerage firms
each established an OSJ.
Failure to Respond to Red Flags Regarding Bleidt’s Financial Situation
10. While under Respondent’s supervision at all three broker-dealers, Bleidt was
pursuing other business interests. Respondent was aware that he conducted outside business
activities, including two investment advisory businesses and ownership in a radio station.
Respondent also was aware that one of the investment advisory businesses, FPPS, was not
profitable and that Bleidt was providing cash infusions to keep it afloat. These cash infusions
4
from Bleidt to FPPS and Bleidt’s outlay of funds for his radio station activities and ownership
were misappropriated funds. McCarty accepted Bleidt’s explanation that the source of his
money was a “trust fund,” without any evidence of the existence of the trust fund and the dollar
amounts therein. As Bleidt’s supervisor, McCarty was responsible for conducting further
investigation into whether Bleidt was violating the securities laws when such “red flags”
appeared. McCarty did not discharge his supervisory duties and failed to investigate the red
flags presented by Bleidt’s ability to fund significant cash requirements and willingness to fund a
losing business. If Respondent had investigated these red flags, it is likely that he could have
prevented or detected the fraud.
Failure to Follow Written Procedures at DMFG Regarding Opening and Review of
Incoming Mail
11. Incoming mail at the OSJ was sorted – unopened and unreviewed – into registered
representatives’ mailboxes during the entire time that McCarty supervised Bleidt. The lack of
review of incoming mail enabled Bleidt to receive checks and related correspondence from
Respondent’s customers who had liquidated their brokerage accounts. These checks were
typically in amounts mirroring the amounts liquidated and were sent to Bleidt for the purpose of
continuing to invest in securities. McCarty did not follow DMFG’s written supervisory
procedures for the opening and review of incoming mail, which required central mail opening at
the OSJ. Numerous suspicious checks and correspondence arrived at Bleidt’s office throughout
the entire period of his fraud. Had McCarty followed DMFG’s policy of reviewing all incoming
mail, he would have encountered one or more “red flag” pieces of mail and it is likely that he
could have prevented or detected the fraud.
Failure to Follow Written Procedures at Commonwealth and DMFG Regarding Annual
Audits of Registered Representatives
12. McCarty was not conducting the formal annual audits of each registered
representative required by Commonwealth’s and DMFG’s written supervisory procedures, which
involved an interview of the representative and a review of certain books and records.
Commonwealth’s written procedures dictated that McCarty was to audit each individual
representative annually using a checklist, and then Commonwealth was to review those
inspections during its own audit of the OSJ. Similarly, DMFG’s written procedures required
annual interviews of each representative and/or an inspection of certain books and records. Had
McCarty conducted the formal audits required by Commonwealth’s and DMFG’s procedures, it
is likely that he would have uncovered evidence of Bleidt’s misconduct and could have
prevented or detected the fraud.
Conclusions
13. Section 15(b)(6) of the Exchange Act, incorporating by reference Section
15(b)(4)(E) of the Exchange Act, authorizes the Commission to sanction a person who is
associated, or at the time of the alleged misconduct was associated, with a broker or dealer for
5
failing reasonably to supervise, with a view to preventing violations of the federal securities law,
another person who commits such a violation, if that person is subject to the person’s supervision.
McCarty was responsible for supervising Bleidt. Similarly, Section 203(f) of the Advisers Act,
incorporating by reference Section 203(e)(6) of the Advisers Act, authorizes the Commission to
sanction a person who is associated, or at the time of the alleged misconduct was associated, with
an investment adviser for failing reasonably to supervise, with a view to preventing violations of
the federal securities law, another person who commits such a violation, if that person is subject to
the person’s supervision.
14. Because Bleidt violated Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, and McCarty failed to adequately investigate red flags of Bleidt’s fraud and failed to
follow Commonwealth’s and DMFG’s written supervisory procedures, McCarty failed reasonably
to supervise Bleidt within the meaning of Section 15(b)(6) of the Exchange Act, incorporating by
reference Section 15(b)(4)(E) of the Exchange Act, and within the meaning of Section 203(f) of
the Advisers Act, incorporating by reference Section 203(e)(6) of the Advisers Act.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to
impose the sanctions agreed to in Respondent McCarty’s Offer.
Accordingly, pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the
Advisers Act, it is hereby ORDERED that:
A. Respondent McCarty be, and hereby is, barred from association in a supervisory
capacity with any broker, dealer, or investment adviser.
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.
B. It is further ordered that Respondent shall pay disgorgement of $1 and a civil
money penalty in the amount of $50,000 to the Securities and Exchange Commission, on the
following schedule:
(a) within ten days of the entry of the Order, a payment of $20,001;
(b) within 90 days of entry of the Order, a payment of $7,500;
(c) within 180 days of entry of the Order, a payment of $7,500;
(d) within 270 days of entry of the Order, a payment of $7,500;
6
(e) within 360 days of entry of the Order, a payment of $7,500;
Such payments 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 Office of Financial Management, Securities and
Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA
22312; and (D) submitted under cover letter that identifies McCarty as a Respondent in these
proceedings, the file number of these proceedings, a copy of which cover letter and money order or
check shall be sent to David P. Bergers, Regional Director, Securities and Exchange Commission,
33 Arch Street, 23rd Floor, Boston, Massachusetts 02110.
C. It is further ordered that the disgorgement and penalties referenced in paragraph B
above shall be paid into the Fair Fund created pursuant to Section 308(a) of the Sarbanes-Oxley
Act of 2002 in In the Matter of Commonwealth Equity Services, LLP d/b/a Commonwealth
Financial Network, Administrative Proceeding File No. 3-12749 (34-56362). Regardless of
whether any such Fair Fund distribution is made, amounts ordered to be paid as civil money
penalties pursuant to this Order shall be treated as penalties paid to the government for all
purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty,
Respondent agrees that he shall not, after offset or reduction in any Related Investor Action based
on Respondent’s payment of disgorgement in this action, argue that he is entitled to, nor shall he
further benefit by offset or reduction of any part of Respondent’s payment of a civil penalty in this
action ("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty Offset,
Respondent agrees that he shall, within 30 days after entry of a final order granting the Penalty
Offset, notify the Commission's counsel in this action and pay the amount of the Penalty Offset to
the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not
be deemed an additional civil penalty and shall not be deemed to change the amount of the civil
penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action"
means a private damages action brought against Respondent by or on behalf of one or more
investors based on substantially the same facts as alleged in the Order instituted by the
Commission in this proceeding.
By the Commission.
Nancy M. Morris
Secretary
UNITED STATES OF AMERICA
In the Matter of
JAMES X. McCARTY,
Respondent.
Summary
Respondent
Other Relevant Person
Bleidt’s Misconduct
Respondent’s Failure to Supervise
IV.