The Securities and Exchange Commission suit against Galleon Capital Management's Louis Acevedo is the first the agency brought for misappropriation of soft dollars for personal use.
The case shows the tougher scrutiny the SEC is giving to soft dollars, the practice of money managers directing brokerage commissions to pay for services.
In U.S. District Court for Southern California, the SEC on Oct. 31 filed a complaint against Mr. Acevedo, Galleon's president, chief executive officer and chief investment officer. The San Diego firm was one of the nation's largest minority managers.
The SEC said Mr. Acevedo misappropriated $285,916 in soft dollars for personal use. The complaint accused Mr. Acevedo of submitting phony receipts to convert the soft dollars to cash and of churning accounts to generate more soft-dollar commissions.
Without admitting or denying the allegations, Mr. Acevedo, consented simultaneously to the filing of the complaint to pay back $243,000 of the $285,916 he is accused of taking.
The case "reflects the commission's increased emphasis on investment advisers and continued concern in the soft-dollar arena," said Laura Singer, assistant director of enforcement at the SEC in Washington and one of five SEC attorneys who brought the complaint.
"In the past, the commission has brought cases on whether the use of soft dollars was qualified under the 28(e) safe harbor" rule in the Investment Advisory Act, Ms. Singer said.
"But this (Galleon) is not a gray area case. It was turning soft dollars into cash," she said. "It's misappropriation .."
The SEC waived his payment of any amount in excess of $243,000 "based upon a demonstrated inability to pay."
In the consent decree, the court didn't order Mr. Acevedo or Galleon to pay any penalty.
"The court does, however, note the appropriateness of a civil penalty in this instance," the decree states. "The determination that ... (Mr.) Acevedo and Galleon are unable to pay a civil penalty is contingent on the truthfulness of the representations in the financial statement."
In agreeing to the consent judgment, Mr. Acevedo and Galleon waive any right to appeal the case.
Ms. Singer said the SEC hasn't decided whether it will distribute the $243,000 to Galleon clients to cover the alleged soft-dollar misappropriations.
Ms. Singer said the SEC could decide to keep the money should the cost of distributing it, including the hiring of a receiver and other expenses, prove to be too much.
The court will hold the money from the judgment in an interest-bearing account until the SEC submits a disbursement plan.
The SEC, despite the settlement, is continuing its investigation into Galleon and possibly related parties, the complaint noted. Ms. Singer said as a matter of policy the SEC wouldn't disclose any details about the continuing investigation.
The firm is "winding down," according to Mr. Acevedo's attorney, Michael L. Lipman.
Galleon's office is closed and its telephone is disconnected. Mr. Acevedo, who founded Galleon and registered it as an investment adviser in 1991, didn't return phone calls to his residence.
Mr. Acevedo doesn't feel he cheated his clients, Mr. Lipman said. He said Mr. Acevedo believes he handled his clients' accounts properly.
Galleon's clients have gone to other firms, Mr. Lipman said without giving any details.
Among those clients that dropped Galleon are the New York City Employees' Retirement System; the Los Angeles Police & Fire Pension System; the Los Angeles City Employees' Retirement System; the Los Angeles Metropolitan Transit Authority pension fund; the Archdiocese of Los Angeles; Progress Investment Management Co., San Francisco; and the Los Angeles College of Chiropractic; Whittier, Calif. (Pensions & Investments, Oct. 17).
The complaint doesn't strip Mr. Acevedo of his registration as an investment adviser. But Ms. Singer, while declining to reveal what the SEC will do, said the commission could revoke his registration.
Ms. Singer declined to reveal how the SEC learned of possible illegal activities at Galleon.
The 36-page complaint and judgment accused Mr. Acevedo and Galleon of submitting phony receipts to obtain soft-dollar payments and of churning accounts, or engaging in excessive trading, to generate more soft dollars.
In one account, "the turnover rate was 440% over an eight-month period on an annualized basis," the complaint states without identifying the account.
The complaint centered on soft-dollar arrangements Galleon made with two broker-dealers.
In June 1992, according to the complaint, Galleon opened accounts with one broker-dealer, whereby Galleon received $1 in soft-dollar benefits for every $1.60 in commissions generated from accounts of Galleon's clients.
In October 1993, Galleon opened accounts with the other broker, whereby Galleon received $1 in soft-dollar benefits for every $1.67 commissions.
Neither broker was identified. In fact, the suit also concealed the identities of Galleon employees it states Mr. Acevedo used in the soft-dollar scheme.
The complaint identified only one party to the alleged scheme, referring to it simply as DJS Consulting without any further identification.
The complaint described how many, though not all, of Galleon's phony soft dollar submissions went through DJS Consulting.
The suit alleges DJS submit phony invoices to and received payment from the two brokerage firms for computer services it purportedly rendered to Galleon.
"(S)uch invoices were inappropriate in that no .*.*. legitimate 'soft-dollar' services were rendered by DJS Consulting to Galleon," the complaint states.
"(T)he funds received by DJS Consulting were, at Acevedo's direction, transferred directly or indirectly to Acevedo and converted by Acevedo to his personal benefit."
DJS submitted the phony invoices starting sometime in 1992 through at least September 1994, the complaint states.
According to the complaint, Mr. Acevedo and Galleon failed, in violation of SEC requirement, to amend its registration form to disclose their soft dollar arrangements with the two brokers.