The SEC: The Great Pretender

March 24, 2010

Without admitting or denying the findings, Respondent Southwest Securities, Inc., a wholly-owned subsidiary of SWS Group, Inc.,  submitted an offer of settlement to the SEC.  See, Order Instituting Administrative And Cease-And-Desist Proceedings, Pursuant To Sections 15(B), 15b(C)(2) And 21c Of The Securities Exchange Act Of 1934, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order, In the Matter of Southwest Securities, Inc. (Release No. 34-61768; File No. 3-13831; March 24, 2010). http://sec.gov/litigation/admin/2010/34-61768.pdf

 

The No-Name Gang?

 

The SEC's Southwest proceedings involve violations of the law concerning political contributions and municipal securities business by Southwest, a broker-dealer and municipal securities dealer. From December 2000 to July 2009, a sales person with the title of senior vice president in Southwest's public finance office ("senior vice president"), engaged in solicitation activities that made him a "municipal finance professional" under Municipal Securities Rulemaking Board ("MSRB") Rule G-37. The senior vice president made political contributions to an incumbent for office with influence over the awarding of municipal securities business by certain state issuers in Massachusetts.

 

Between 2003 through 2008, the senior vice president contributed $1,625 to an incumbent who was also at the time of the contributions a candidate for elective office in the Commonwealth of Massachusetts (hereinafter "the issuer official"). The contributions were made through seven different checks during two election cycles.

 

  • On February 8, 2003, March 25, 2004 and June 22, 2005, the senior vice president contributed $250 to the issuer official through three different personal checks, for a total of $750. These contributions were all made before the primary election in 2006. The contributions on March 25, 2004 and June 22, 2005 placed the senior vice president's total contributions for the primary election above the $250 de minimis exception; and
  • On December 15, 2006, May 29, 2007, December 10, 2007 and April 28, 2008, before the scheduled primary election in 2010, in which the incumbent expected to be a candidate, the senior vice president contributed $875 to the issuer official through four different personal checks. Each of the contributions on May 29, 2007, December 10, 2007 and April 28, 2008 placed the senior vice president's total contributions above the $250 de minimis exception.

COMMENT: Please note that nowhere in the SEC's Southwest Order are the names of the senior vice president or the issuer official disclosed.  Is this a national secret? Is this a sensible way to publicly disclose a case in which the focal point was the senior vice president's improper campaign contributions to a candidate for elective office?

 

Within two years of the political contributions at issue, Southwest engaged in municipal securities business with the issuers associated with the incumbent who received the political contributions. Southwest's engagement in municipal securities business with these issuers violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-37(b). The contributions were not disclosed on MSRB Forms G-37 in violation of MSRB Rule G-37(e). Southwest's engagement in municipal securities business with these issuers violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-37(b). The contributions were not disclosed on MSRB Forms G-37 in violation of MSRB Rule G-37(e).

 

As a result, the SEC Ordered that:

A. Respondent Southwest cease and desist from committing or causing any violations and any future violations of Section 15B(c)(1) of the Exchange Act, MSRB Rule G37(b) and MSRB Rule G-37(e).

B. Respondent Southwest shall, within 10 days of the entry of this Order, pay disgorgement of $348,154 and prejudgment interest of $71,993 to the United States Treasury.

C. Respondent Southwest shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of $50,000 to the United States Treasury.

 

Now, consider this tidbit.

 

The "No Mention of the Southwest Settlement" Proceeding

 

The SEC instituted proceedings against Respondent John F. Kendrick, which he has so far declined to settle. See, Order Instituting Administrative And Cease-And-Desist Proceedings, Pursuant To Sections 15(B), 15b(C)(4) And 21c Of The Securities Exchange Act Of 1934 And Notice Of Hearing, In the Matter of John F. Kendrick (Release No. 34-61767; File No. 3-13830, March 24, 2010).

http://sec.gov/litigation/admin/2010/34-61767.pdf

 

Who is John F. Kendrick, you ask,  and what, if anything, does he have to do with the settled case above involving Southwest Securities, Inc.? Ah, grasshopper, you must be patient.  Consider this revelation in Paragraph 1 of the Kendrick Order Instituting Proceedings (OIP):

Respondent was the senior vice president of public finance for New England in Southwest Securities, Inc.'s Medfield, Massachusetts branch office between December 1, 2000 and July 2009. Kendrick was also a registered representative associated with Southwest Securities, Inc., a registered broker-dealer and municipal securities dealer. Kendrick, 65 years old, is a resident of Medfield, Massachusetts.

Eureka!  Have we broken the SEC's code?  Is the unnamed senior vice president in Southwest this Respondent John F. Kendrick?   But wait, there are more revelations to come.  Consider Paragraph 4 of the Kendrick OIP:

Between 2003 through 2008, Kendrick contributed $1,625 to Timothy Cahill, the treasurer of the Commonwealth of Massachusetts (hereinafter "the treasurer"). The treasurer was an incumbent who was also at the time of the contributions a candidate for elective office in the Commonwealth of Massachusetts. . .

Double Eureka!!  Will miracles never cease?  Not only have we cracked the code about Kendrick, but we now learn that the unnamed "issuer official" in Southwest was the Treasurer of the Commonwealth of Massachusetts Timothy Cahill.

 

Unlike the settled Southwest matter, the SEC instituted public administrative and cease-and-desist proceedings (please note that Kendrick is presumed innocent until proven guilty), and alleged that Kendrick willfully:  

  • caused Southwest's violations of MSRB Rule G-37(b), which prohibits brokers, dealers or municipal securities dealers from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by (i) the broker, dealer or municipal securities dealer; (ii) any municipal finance professional associated with such broker, dealer or municipal securities dealer; or (iii) any political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional, unless the contribution is exempt;
  • violated Rule G-37(c) of the MSRB, which prohibits, among other things, brokers, dealers, municipal securities dealers or any municipal finance professional of the broker, dealer or municipal securities dealer from soliciting any person to make any contributions or coordinating any contributions to an official of an issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business; and
  • caused Southwest's violations of Section 15B(c)(1) of the Exchange Act, which prohibits a broker, dealer or municipal securities dealer from using the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in contravention of any rule of the MSRB.  

COMMENT: Nothing in the SEC's Southwest Order cross references, by name, Kendrick or Cahill. Nothing in the SEC's Kendrick OIP discloses that Southwest settled its SEC proceeding.  Consequently, if someone were to come across Southwest, that reader would have no inclination as to the actual identity of Kendrick or Cahill.  Similarly, a reader of Kendrick would have no idea that Southwest had settled its matter.  Why the guessing game?

 

Of course, while I don't have any proof, I'm guessing that the sequential nature of the Southwest and Kendrick matters may indicate some connection - no matter how attenuated (yes, that's sarcasm on my part!):

Kendrick:     Release No. 34-61767; File No. 3-13830

Southwest: Release No. 34-61768; File No. 3-13831 

Is this an oddball aberration?  Frankly, no - consider Where's Waldo: Find the Name of JP Morgan's Vice Chairman in the SEC Report  http://www.brokeandbroker.com/index.php?a=blog&id=340

 

You tell me -- does this hide-and-seek regulation serve the public or educate the industry?  Whatever the alleged policy that mandates this non-disclosure, please keep in mind that everything, and I mean EVERYTHING, is fully set out in Kendrick, so what's the point of pretending? 

 

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