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March 1, 1999

Brokerage Settles Soft-Dollar Fraud Case: Firm's President Is Also Charged in First SEC Action on

By Jeffrey L. Winograd

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  • Brokerage Settles Soft-Dollar Fraud Case: Firm's President Is Also Charged in First SEC Action on

In a landmark case, a New York-based broker dealer and the firm's president have settled charges that they willfully aided and abetted soft-dollar fraud by an investment adviser.

The Securities and Exchange Commission, which brought and settled charges against Republic New York Securities and its president, James Edward Sweeney, said it was the first case of its kind.

The SEC had never previously brought enforcement action in that area, though it had warned broker dealers that assisting an investment adviser in committing soft-dollar fraud could make them liable to agency charges.

Directed Brokerage

The case involved directed brokerage by customers of the investment adviser, Sweeney Capital Management (SCM) in San Francisco. In a typical arrangement, an investment adviser's customers direct a percentage of trades to specified broker dealers. The broker dealers, in return, provide services to the adviser's customers, or pay a portion of the customers' expenses.

In this case, the SEC found that between May 1994 and April 1995, Republic New York Securities rebated roughly $84,000 in soft-dollar benefits to SCM.

At the same time, SCM and its principals misappropriated soft dollars from their advisory customers buying and selling stocks without disclosing that they were using the customers' soft-dollar rebates for personal costs and overhead expenses, according to the SEC.

Among the items the SEC said that Republic New York Securities paid for were telephone bills, marketing, accounting and legal services, furniture, rent, parking, office supplies and client gifts. The broker dealer allegedly made payments for consultants with soft dollars using bogus invoices submitted by SCM. The SEC said all the spending was approved by Sweeney. (He has no apparent familial connection with SCM.)

Republic New York Securities and Sweeney agreed to pay penalties of $50,000 and $25,000 respectively. They did not admit nor deny the SEC's findings.

The First Case

The action comes less than six months after the SEC's largely uneventful inspection report on the current state of soft-dollar practices. The SEC, which is pushing for more soft-dollar disclosure, seems to have achieved little with the release of the report. The soft-dollar probe was conducted between late 1996 and early 1997, long after the SCM investigation.

Certainly, the action against Republic New York Securities does not involve a substantial amount of money, roughly $84,000. While Michael Dicke, a staff attorney at the SEC's Enforcement Division, said the industrywide soft-dollar probe and the case against Republic New York Securities are not connected, the timing of the settlement was noticed by soft-dollar experts.

Nevertheless, one expert said the SEC's latest action did not indicate a new get-tough policy.

"I cannot say this case is anything other than a reaffirmation of present law," said Lee Pickard, a Washington-based attorney who specializes in soft-dollar law. "It reconfirms that services must be provided by brokers pursuant to Section 28(e) [of the Securities Exchange Act of 1934]."

"A broker has a higher duty of inquiry," Pickard warned. "In this case, the broker is deemed to be an aider and abetter."

For his part, the SEC's Dicke said in an interview with Traders Magazine that the message from the SEC is clear.