SEC Press pdf 52 KB 21,650 chars

In the Matter of : PROCEEDINGS, MAKING FINDINGS,

Exhibit of Press Release: SEC Charges A.G. Edwards With Failing to Supervise Brokers Who Engaged in Illegal Market Timing

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summary

A.G. Edwards & Sons, Inc. failed to supervise financial consultants who engaged in illegal market timing schemes between 2001 and 2003, resulting in a $3.86 million SEC penalty.

paragraph

Between January 2001 and September 2003, A.G. Edwards financial consultants engaged in illegal market timing schemes, defrauding over 200 mutual funds and generating $1.93 million in fees. The firm failed to adopt reasonable policies to monitor market timing and detect deceptive practices. A.G. Edwards was ordered to pay $3.86 million in disgorgement, interest, and a civil penalty.

narrative

A.G. Edwards & Sons, Inc., a broker-dealer registered with the SEC since 1967, failed to reasonably supervise its financial consultants between January 2001 and September 2003. During this period, certain financial consultants engaged in illegal market timing schemes on behalf of customers, including large hedge funds, defrauding over 200 mutual funds from approximately 50 different mutual fund companies. The financial consultants used deceptive practices to circumvent mutual fund restrictions, and A.G. Edwards received approximately $1.93 million in fees from these market timing customers. Despite receiving hundreds of warning notices from mutual fund companies and an internal report in April 2003 highlighting the issue, A.G. Edwards failed to implement adequate monitoring systems or respond effectively until September 2003. The SEC found A.G. Edwards in violation of Section 15(b)(4)(E) of the Exchange Act for failing to reasonably supervise its financial consultants. Without admitting or denying the findings, A.G. Edwards consented to an SEC order imposing a $3.86 million penalty, comprising disgorgement, interest, and a civil fine. The firm also agreed to retain an independent consultant to review and strengthen its compliance policies and procedures.

Enriched metadata

Scheme: broker-dealer-fraud (100%)
Outcome: settled
Disgorgement: $1,930,000
Civil penalty: $3,860,000
Victim loss: $1,930,000

Classified broker-dealer-fraud(confidence 100%). EDGAR detection: forms Form D· recall 29% / precision 9%. detection rule →

Extracted insights

Dollar amounts 5

$3.86M $3,860,000 $1M–$10M
$1.93M $1.93 million $1M–$10M
$1.93M $1,930,000 $1M–$10M
$1.50M $1,500,000 $1M–$10M
$430K $430,000 $100K–$1M

Entities 4

company a.g. edwards, inc.
company a.g. edwards & sons, inc.
person nyse under symbol age
agency Securities and Exchange Commission

Triples 10

SEC instituted administrative proceedings against A.G. Edwards & Sons, Inc.
A.G. Edwards & Sons, Inc. is registered as broker-dealer since 1967
A.G. Edwards & Sons, Inc. has headquarters in St. Louis, Missouri
A.G. Edwards & Sons, Inc. has approximately 730 offices with 6,824 registered representatives
A.G. Edwards & Sons, Inc. is member of NASD and NYSE
A.G. Edwards, Inc. trades on NYSE under symbol AGE
A.G. Edwards & Sons, Inc. failed to supervise registered financial consultants engaged in illegal market timing schemes
Registered financial consultants at A.G. Edwards engaged in illegal market timing schemes between January 2001 and September 2003
A.G. Edwards financial consultants defrauded over 200 mutual funds from approximately 50 mutual fund companies
A.G. Edwards failed to adopt reasonable policies and procedures to monitor market timing

PDF

In the Matter of : PROCEEDINGS, MAKING FINDINGS, · Source

Text layers

Extracted body text (21,650c)

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 55692 / May 2, 2007

ADMINISTRATIVE PROCEEDING
File No. 3-12624

: ORDER INSTITUTING ADMINISTRATIVE
In the Matter of : PROCEEDINGS, MAKING FINDINGS,
: AND IMPOSING REMEDIAL SANCTIONS
A.G. EDWARDS & : PURSUANT TO SECTION 15(b) OF THE
SONS, INC., : SECURITIES EXCHANGE ACT OF 1934
:
Respondent. :
:

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”) against A.G. Edwards & Sons, Inc. (“AG Edwards” 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 it 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
(“Order”), as set forth below.

III.

On the basis of this Order and Respondent’s Offer, the Commission finds
1
that:

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.

Respondent

1. AG Edwards is a Delaware corporation with headquarters located in St. Louis,
Missouri. AG Edwards has been registered with the Commission as a broker-dealer
pursuant to Section 15 of the Exchange Act since 1967 and is a member of the National
Association of Securities Dealers, Inc. (“NASD”) and the New York Stock Exchange
(“NYSE”). It has approximately 730 offices staffed by approximately 6,824 registered
representatives, referred to at AG Edwards as “financial consultants” (“FCs”), that
provide retail brokerage services throughout the United States, Switzerland and the
United Kingdom. AG Edwards is the principal operating subsidiary of A.G. Edwards,
Inc., a Delaware corporation whose stock is traded on the NYSE under the symbol AGE.

Background

2. Between at least January 2001 and September 2003, AG Edwards failed
reasonably to supervise certain of its registered FCs with a view to preventing their
violations of the federal securities laws. During the relevant time period, registered FCs
in several of AG Edwards’ branch offices engaged in illegal market timing schemes on
behalf of customers, including several large hedge funds.
2
These FCs defrauded over
200 mutual funds from approximately 50 different mutual fund companies and their
shareholders by engaging in deceptive practices designed to circumvent restrictions that
the mutual funds imposed on market timing. Through these activities the FCs violated
the antifraud provisions of the federal securities laws.

3. AG Edwards failed reasonably to supervise its FCs with a view to detecting and
preventing their illegal market timing schemes. AG Edwards failed to adopt reasonable
policies, procedures or systems to monitor market timing in order to detect and prevent
its FCs’ misconduct. In particular, AG Edwards failed to develop reasonable policies,
procedures or systems for monitoring and responding to red flags indicating that its FCs
were using deceptive practices. In addition, AG Edwards failed to implement reasonable
policies, procedures or systems to monitor whether its FCs discontinued their abusive
trading in response to requests by mutual fund companies.

The FCs’ Misconduct

4. Between at least January 2001 and September 2003, certain of AG Edwards’
registered FCs opened accounts for customers who planned to place market timing trades.

5. The majority of these accounts were fee-based accounts in AG Edwards’ Fund
Navigator program, later called the Preferred Fund Advisor program. Customers with

2
“Market timing” refers to (a) frequent buying and selling of shares of the same mutual fund or (b) buying
or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Market timing, while
not illegal per se, can harm other mutual fund shareholders because it can dilute the value of their shares if
the market timer is exploiting pricing inefficiencies, disrupt the management of the mutual fund’s
investment portfolio or cause the targeted mutual fund to incur costs borne by other shareholders to
accommodate frequent buying and selling of shares by the market timer.

fee-based accounts did not pay commissions to AG Edwards and its FCs for each
transaction placed in their accounts. Instead, these customers paid AG Edwards a
quarterly fee ranging from 1% to 1.5% of the total assets in the account. During the
relevant time period, AG Edwards received approximately $1.93 million in fees from
certain market timing customers.

6. Between at least January 2001 and September 2003, certain of AG Edwards’ FCs
placed tens of thousands of trades on behalf of their market timing customers. Most of
these trades were in mutual funds that prohibited or specifically limited the number and
frequency of trades in an effort to prevent market timing.

7. Over time, AG Edwards received hundreds of telephone calls, letters, e-mails and
canceled trade notices (collectively “restriction notices”) from mutual fund companies
objecting to market timing trades placed by AG Edwards’ FCs. The restriction notices
informed AG Edwards that the fund companies rejected particular trades or restricted
particular accounts, customers or FCs, either by FC name or by FC identification number,
because they appeared to be market timing. Some restriction notices also warned AG
Edwards that particular customer accounts were close to reaching their limits for trading.
Many of the mutual fund companies who sent restriction notices to AG Edwards
requested AG Edwards’ assistance in helping them prevent further market timing by
particular FCs, FC identification numbers, customers or accounts.

8. The majority of the written restriction notices were sent to the mutual fund order
room at AG Edwards’ headquarters in St. Louis, Missouri. As the restriction notices
came in, employees in the order room updated AG Edwards’ trading system to reflect
canceled trades and then sent copies of the restriction notices to the FCs and branches
involved in the trading and maintained the originals. AG Edwards, however, failed to
develop reasonable policies, procedures or systems to monitor whether its employees
followed up on the mutual fund companies’ restriction notices and requests for assistance
in preventing further market timing by particular FCs, customers or accounts.

9. In order to continue market timing on behalf of their customers after receiving
copies of the restriction notices, certain FCs engaged in a series of acts and practices
designed to conceal their customers’ market timing activity from mutual fund companies
that prohibited or restricted the trading. These acts and practices included: 1) using
multiple account numbers for the same customer; 2) opening accounts in the names of
multiple entities affiliated with the same customer; 3) opening accounts at different
branch offices for the same customer; 4) placing trades using multiple FC identification
numbers; and 5) transferring assets between related accounts.

10. By using these acts and practices, certain FCs disguised their own identities and
the identities of their market timing customers and disguised the fact that multiple short-
term trades were attributable to the same customers. Through these deceptive tactics,
certain FCs enabled their market timing customers to continue trading with mutual funds
that previously restricted their market timing activities.

AG Edwards’ Supervisory Failures

11. At all relevant times, AG Edwards required its branch managers to approve FCs’
requests to open new accounts for customers. Branch managers in several of AG
Edwards’ branches regularly approved the opening of new accounts for AG Edwards’
market timing customers. These customers had multiple accounts through which AG
Edwards’ FCs were able to place the customers’ market timing trades and evade
restrictions imposed by mutual fund companies.

12. AG Edwards issued each of its registered FCs one unique identification number
through which to place trades on behalf of customers. However, FCs could obtain
additional FC identification numbers with which they could place trades by entering into
a “split” with one or more other FCs. At all relevant times, AG Edwards required its FCs
to submit requests for new split FC numbers to its registrations department in St. Louis,
Missouri. A legitimate reason for an FC to request a new split FC number was to share
commissions and fees with one or more additional FCs who serviced the same client.

13. In contrast, certain of AG Edwards’ FCs regularly obtained additional split FC
numbers not for the purpose of legitimately sharing commissions and fees with other FCs
for servicing particular customer accounts, but instead to continue market timing mutual
funds that previously restricted them from trading under other FC numbers and split FC
numbers. Because many mutual fund companies restricted further trading by FC
numbers rather than by FC names, these FCs were able to evade restrictions imposed by
mutual fund companies by obtaining new split FC numbers.

14. During the Fall of 2002, a senior vice president in AG Edwards’ operations
department learned about the existence of the restriction notices from employees in AG
Edwards’ order room. At this time, this senior vice president and other officers and
employees convened a working group to research whether AG Edwards should allow
market timing to continue to occur at AG Edwards.

15. Between October 2002 and April 2003, the working group gathered restriction
notices and identified many of the customers, FCs and branches that placed market
timing trades through accounts at AG Edwards. In April 2003, the working group issued
a report to members of AG Edwards’ senior management detailing the extent of the
continuing market timing at the firm and recommending that AG Edwards take steps to
prevent any further market timing from occurring.

16. Notwithstanding the working group’s report, AG Edwards did not develop or
implement any policies or sufficient procedures to address the market timing activity at
the firm until at least September 2003.

17. Starting in September 2003, AG Edwards began taking certain remedial actions to
address market timing, including: adopting a policy to prohibit market timing activity
through AG Edwards; and adopting and implementing new supervisory and operational
procedures designed to detect and prevent mutual fund market timing.

18. Thus, between at least January 2001 and September 2003, AG Edwards failed
reasonably to supervise certain of its FCs with a view to detecting and preventing their
violations of the antifraud provisions of the Securities Act of 1933 (“Securities Act”) and
the Exchange Act. In particular, AG Edwards failed to adopt or implement reasonable
supervisory and compliance policies, procedures or systems that could have detected or
prevented its FCs’ deceptive market timing schemes. AG Edwards failed to have
reasonable policies, procedures or systems to monitor whether multiple accounts and
multiple split FC numbers were used for legitimate purposes, rather than to conceal the
FCs’ identities and the identities of their market timing customers from mutual fund
companies that restricted their market timing. In addition, AG Edwards failed to have
reasonable policies, procedures or systems in place for employees to respond to red flags
and warnings of improper conduct in the form of hundreds of restriction notices from
mutual fund companies objecting to the market timing activity. If AG Edwards had had
in place reasonable policies, procedures or systems to monitor its FCs’ use of multiple
account numbers and split FC numbers and provided guidance to its employees on
responding to restriction notices, it is likely that AG Edwards could have detected and
prevented the FCs’ violations of the antifraud provisions of the Securities Act and the
Exchange Act.

Violations

19. As a result of the conduct described above, certain of AG Edwards’ FCs willfully
violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule
10b-5 thereunder which prohibit fraudulent conduct in connection with the offer,
purchase or sale of securities.

Failure to Supervise

20. Section 15(b)(4)(E) of the Exchange Act provides for the imposition of a sanction
against a broker or dealer who “has failed reasonably to supervise, with a view to
preventing violations of the securities laws, another person who commits such a
violation, if such other person is subject to [its] supervision.” As a result of the conduct
described above, AG Edwards failed reasonably to supervise its FCs with a view to
preventing their willful violations of the federal securities laws.

Undertakings

21. AG Edwards undertakes the following:

a. AG Edwards shall retain, within 60 days of the date of entry of this Order,
the services of an Independent Consultant not unacceptable to the staff of the
Commission. AG Edwards shall exclusively bear all costs, including compensation and
expenses, associated with the retention of the Independent Consultant. AG Edwards shall
retain the Independent Consultant to: 1) conduct a review to determine whether the
changes AG Edwards has adopted and implemented to its policies and procedures to

correct the activities described in this Order are reasonably designed to detect and prevent
any future market timing by AG Edwards’ registered FCs on behalf of their customers
and to ensure compliance with Section 15 of the Exchange Act; 2) determine whether and
to what extent there is a need for additional or amended policies and procedures to detect
and prevent market timing by AG Edwards’ registered FCs on behalf of their customers
and to ensure compliance with Section 15 of the Exchange Act; and 3) recommend that
AG Edwards adopt such additional policies and procedures as the Independent
Consultant believes are necessary to provide reasonable assurances that AG Edwards can
detect and prevent market timing by AG Edwards’ registered FCs on behalf of their
customers.

b. AG Edwards shall cooperate fully with the Independent Consultant and
provide the Independent Consultant with access to its files, books, records and personnel
as reasonably requested for the Independent Consultant’s review.

c. AG Edwards shall further retain the Independent Consultant to, at the
conclusion of the review, which in no event shall be more than 180 days after the date of
entry of this Order, submit to AG Edwards and to the Commission’s staff a written
Report regarding AG Edwards’ compliance with its policies and procedures and the
adequacy of those policies and procedures. The Report shall include a description of the
review performed, the conclusions reached and, if necessary, recommendations for
changes in or improvements to the policies and procedures and a procedure for
implementing the recommended changes or improvements.

d. Within 30 days of receipt of the Independent Consultant’s Report, AG
Edwards shall adopt all recommendations contained in the Report and remedy any
deficiencies in its policies and procedures; provided, however, that as to any
recommendation that AG Edwards believes is unnecessary or inappropriate, AG Edwards
may, within 30 days of receipt of the Report, advise the Independent Consultant and the
Commission’s staff in writing of any recommendations that it considers to be
unnecessary or inappropriate. With respect to any recommendation that AG Edwards
considers unnecessary or inappropriate, AG Edwards shall propose in writing an
alternative policy, procedure or system designed to achieve the same objective or
purpose.

e. With respect to any recommendation with which AG Edwards and the
Independent Consultant do not agree, AG Edwards shall attempt in good faith to reach an
agreement with the Independent Consultant within 45 days of receipt of the Report. In
the event that AG Edwards and the Independent Consultant are unable to agree on an
alternative proposal acceptable to the Commission’s staff, AG Edwards will abide by the
original recommendation of the Independent Consultant.

f. Within one year after the date of entry of this Order, AG Edwards shall
submit an affidavit to the Commission’s staff stating that it has implemented any and all
recommendations of the Independent Consultant, or explaining the circumstances under
which it has not implemented such recommendations.

g. To ensure the independence of the Independent Consultant, AG Edwards:
1) shall not have the authority to terminate the Independent Consultant without the prior
written approval of the Commission’s staff; 2) shall compensate the Independent
Consultant, and persons engaged to assist the Independent Consultant, for services
rendered pursuant to this Order at their reasonable and customary rates; and 3) shall not
be in and shall not have an attorney-client relationship with the Independent Consultant
and shall not seek to invoke the attorney-client privilege or any other doctrine or privilege
to prevent the Independent Consultant from transmitting any information, reports or
documents to the Commission or the Commission’s staff.

h. To further ensure the independence of the Independent Consultant, AG
Edwards shall require the Independent Consultant to enter into an agreement that
provides that for the period of the engagement and for a period of two years from
completion of the engagement, the Independent Consultant shall not enter into any
employment, consultant, attorney-client, auditing or other professional relationship with
AG Edwards, or any of its present or former affiliates, directors, officers, employees or
agents acting in their capacity. This agreement shall also provide that the Independent
Consultant will require any firm with which the Independent Consultant is affiliated or of
which the Independent Consultant is a member, and any person engaged to assist the
Independent Consultant in performance of his or her duties under this Order shall not,
without prior written consent of the Commission’s staff, enter into any employment
consultant, attorney-client, auditing or other professional relationship with AG Edwards,
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 two years after
the engagement.

22. For good cause shown, and upon a timely application from AG Edwards or the
Independent Consultant, the Commission’s staff may extend any of the procedural dates
set forth above.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public
interest to impose the sanctions agreed to in AG Edwards’ Offer.

Accordingly, pursuant to Section 15(b) of the Exchange Act, it is hereby
ORDERED that:

A. AG Edwards is hereby censured.

B. IT IS FURTHER ORDERED that:

1. AG Edwards shall, within 30 days of the entry of this Order, pay
disgorgement of $1,930,000, prejudgment interest of $430,000 and a civil money penalty
of $1,500,000, for a total payment of $3,860,000 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 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 AG
Edwards 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 Merri Jo Gillette,
Regional Director, Midwest Regional Office, Securities and Exchange Commission, 175
West Jackson Boulevard, Suite 900, Chicago, IL 60604.

C. AG Edwards shall comply with the undertakings enumerated in Section III.21
above.

By the Commission.

Nancy M. Morris
Secretary

OCR text (21,285c · tika · 95% conf)

UNITED STATES OF AMERICA
Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 55692 / May 2, 2007

ADMINISTRATIVE PROCEEDING
File No. 3-12624

II.

III.

On the basis of this Order and Respondent’s Offer, the Commission finds1 that:

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.

Respondent

Background

2. Between at least January 2001 and September 2003, AG Edwards failed
reasonably to supervise certain of its registered FCs with a view to preventing their
violations of the federal securities laws. During the relevant time period, registered FCs
in several of AG Edwards’ branch offices engaged in illegal market timing schemes on
behalf of customers, including several large hedge funds.2 These FCs defrauded over
200 mutual funds from approximately 50 different mutual fund companies and their
shareholders by engaging in deceptive practices designed to circumvent restrictions that
the mutual funds imposed on market timing. Through these activities the FCs violated
the antifraud provisions of the federal securities laws.

The FCs’ Misconduct

4. Between at least January 2001 and September 2003, certain of AG Edwards’
registered FCs opened accounts for customers who planned to place market timing trades.

5. The majority of these accounts were fee-based accounts in AG Edwards’ Fund
Navigator program, later called the Preferred Fund Advisor program. Customers with

2 “Market timing” refers to (a) frequent buying and selling of shares of the same mutual fund or (b) buying
or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Market timing, while
not illegal per se, can harm other mutual fund shareholders because it can dilute the value of their shares if
the market timer is exploiting pricing inefficiencies, disrupt the management of the mutual fund’s
investment portfolio or cause the targeted mutual fund to incur costs borne by other shareholders to
accommodate frequent buying and selling of shares by the market timer.

AG Edwards’ Supervisory Failures

Violations

Failure to Supervise

Undertakings

21. AG Edwards undertakes the following:

22. For good cause shown, and upon a timely application from AG Edwards or the
Independent Consultant, the Commission’s staff may extend any of the procedural dates
set forth above.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public
interest to impose the sanctions agreed to in AG Edwards’ Offer.

Accordingly, pursuant to Section 15(b) of the Exchange Act, it is hereby
ORDERED that:

A. AG Edwards is hereby censured.

B. IT IS FURTHER ORDERED that:

C. AG Edwards shall comply with the undertakings enumerated in Section III.21
above.

By the Commission.

Nancy M. Morris
Secretary