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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

"You can't just bury your head in the sand if you suspect an investment adviser may be committing fraud," Dicke said. "You either have to stop or find out what's going on.

"If you suspect fraud, you have to find out about it," he added. "That's what the SEC has been saying for a number of years."

The Credits

Soft-dollar benefits, or credits, are perfectly legal, of course. But the law requires institutions to disclose how soft dollars are used, so these credits are not abused. The SEC said Republic New York Securities provided SCM with a $1 soft-dollar credit for every $1.75 in commissions paid by SCM.

The SEC said that Republic New York Securities and Sweeney helped SCM's wrongdoing by processing SCM's trades and paying for its soft-dollar invoices, "without inquiry in the face [of] red flags that suggested that SCM may have been engaged in an illegal course of conduct."

These red flags included a high percentage of invoices submitted by SCM which, on their face, were for SCM's overhead expenses; the sending of all soft-dollar payments to SCM by Republic New York Securities instead of directly to third-party vendors; certain SCM invoices which contained indications of fraud; frequent payments by Republic New York Securities to or on behalf of SCM without expense documentation.

On March 10, the SEC filed related charges against SCM and its principals. The trial is scheduled to begin in July.