UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55688 / May 1, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12623 In the Matter of Shoreland Trading, LLC, Respondent. ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS I. 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 Shoreland Trading, LLC (“Shoreland” 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, and the findings contained in Section III.2 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offer, the Commission finds that: 1. Shoreland is a broker-dealer registered with the Commission. 2 2. On February 6, 2007, a judgment was entered by consent against Shoreland, permanently enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in the civil action entitled Securities and Exchange Commission v. K.L. Group, LLC, et al., Civil Action Number 05-80186-Civ-RYSKAMP/VITUNAC in the United States District Court for the Southern District of Florida. 3. The Commission’s complaint in the civil action alleged that Shoreland and other defendants fraudulently overstated the value of investors’ accounts and the profitability of their trades, while concealing trading losses. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent’s Offer. Accordingly, it is hereby ORDERED: Pursuant to Section 15(b) of the Exchange Act, Respondent Shoreland’s registration with the Commission be, and hereby is, revoked. By the Commission. Nancy M. Morris Secretary
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55690 / May 2, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12519 In the Matter of Cosmetic Center, Inc., Discovery Zone, Inc., Donlar Biosyntrex Corp., Donlar Corp., Impax Laboratories, Inc., Phoenix Waste Services Company, Inc., and Telynx, Inc., Respondents. ORDER MAKING FINDINGS AND REVOKING REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(j) OF THE SECURITIES EXCHANGE ACT OF 1934 AS TO DISCOVERY ZONE, INC. I. The Securities and Exchange Commission (“Commission”) deems it necessary and appropriate for the protection of investors to accept the Offer of Settlement submitted by Discovery Zone, Inc. (“Discovery Zone” or “Respondent”) pursuant to Rule 240(a) of the Rules of Practice of the Commission, 17 C.F.R. § 201.240(a), for the purpose of settlement of these proceedings initiated against Respondent on December 29, 2006, pursuant to Section 12(j) of the Securities Exchange Act of 1934 (“Exchange Act”). II. 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 is admitted, Respondent consents to the entry of this Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Discovery Zone, Inc. (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offer, the Commission finds that1: 1. Discovery Zone (CIK No. 900392) is a Delaware corporation based in Elmsford, New York. At all times relevant to this proceeding, the common stock of Discovery Zone was registered with the Commission under Exchange Act Section 12(g). The Respondent filed a Chapter 11 bankruptcy proceeding on April 20, 1999, which was later converted to a Chapter 7 proceeding on May 23, 2000. 2. Discovery Zone has failed to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder because it has not filed any periodic reports with the Commission since the period ended December 31, 1998. IV. In view of the foregoing, the Commission deems it necessary and appropriate for the protection of investors to impose the sanction specified in Respondent’s Offer. Accordingly, it is hereby ORDERED that: Pursuant to Section 12(j) of the Exchange Act, the registration of each class of Discovery Zone’s securities registered pursuant to Exchange Act Section 12 be, and hereby is, revoked. For the Commission, by its Secretary, pursuant to delegated authority. Nancy M. Morris Secretary 1The 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.
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 8795 / May 2, 2007 SECURITIES EXCHANGE ACT OF 1934 Release No. 55693 / May 2, 2007 INVESTMENT COMPANY ACT OF 1940 Release No. 27816 / May 2, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12625 : ORDER INSTITUTING ADMINISTRATIVE : AND CEASE-AND-DESIST PROCEEDINGS, In the Matter of : MAKING FINDINGS, AND IMPOSING : REMEDIAL SANCTIONS AND A CEASE- CHARLES A. SACCO, : AND-DESIST ORDER PURSUANT TO : SECTION 8A OF THE SECURITIES ACT OF Respondent. : 1933, SECTIONS 15(b) AND 21C OF THE : SECURITIES EXCHANGE ACT OF 1934 AND : SECTION 9(b) OF THE INVESTMENT : COMPANY ACT OF 1940 I. The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 9(b) of the Investment Company Act of 1940 (“Investment Company Act”) against Charles A. Sacco (“Sacco” 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 him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Section 9(b) of the Investment Company Act of 1940 (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offer, the Commission finds1 that: Summary 1. This is a proceeding against Sacco, a former registered representative at A.G. Edwards & Sons, Inc. (“AG Edwards”), a registered broker-dealer. Between May 2002 and September 2003, Sacco used deceptive means to market time mutual fund shares on behalf of two large hedge fund customers.2 By virtue of his conduct, Sacco violated the antifraud provisions of the Securities Act and the Exchange Act. Respondent 2. Sacco, age 29, is a resident of Medford, Massachusetts. Between December 2001 and October 2003, Sacco was employed as a registered representative, referred to at AG Edwards as a “financial consultant” (“FC”), in the Boston Back Bay, Massachusetts branch office of AG Edwards. At all relevant times, Sacco held the following licenses with the National Association of Securities Dealers, Inc. (“NASD”): General Securities Representative (Series 7); Uniform Securities Agent State Law (Series 63); and Registered Investment Adviser (Series 65). Other Relevant Entity 3. AG Edwards is a Delaware corporation with headquarters located in St. Louis, Missouri that has been registered with the Commission as a broker-dealer pursuant to Section 15 of the Exchange Act since 1967. AG Edwards has approximately 730 offices staffed by approximately 6,824 registered 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. 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. 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. 2 Background 4. From approximately May 2002 to September 2003, Sacco engaged in an illegal market timing scheme on behalf of two large hedge fund customers (“Hedge Fund A” and “Hedge Fund B,” collectively, “hedge fund customers”). Sacco defrauded more than 100 mutual funds from at least 25 different mutual fund companies and their shareholders by engaging in a series of deceptive practices designed to conceal his identity and the identities of his hedge fund customers from the mutual fund companies in order to circumvent restrictions that the mutual fund companies imposed on market timing. Sacco’s Trading Practices 5. Starting in approximately May 2002, based on a referral from a former colleague at another broker-dealer, Sacco began opening brokerage accounts for his hedge fund customers. Between May 2002 and September 2003, Sacco opened 129 accounts for Hedge Fund A and 13 accounts for Hedge Fund B. At all relevant times, Sacco knew that Hedge Fund A and Hedge Fund B planned to use their accounts at AG Edwards to place market timing trades. 6. Most of the hedge fund customers’ accounts were fee-based accounts in AG Edwards’ Fund Navigator program, later called the Preferred Fund Advisor program. Through these accounts, the hedge fund customers did not pay commissions for each transaction placed on their behalf. Instead, the customers paid Sacco and AG Edwards quarterly fees ranging from 1% to 1.5% of the total assets in the account. During the relevant time period, Sacco received $215,892.52 in compensation for trading on behalf of his hedge fund customers. 7. Between May 2002 and September 2003, Sacco placed more than 35,000 trades on behalf of his hedge fund customers. Most of these trades were in mutual funds that prohibited or strictly limited the number and frequency of trades in an effort to prevent market timing. 8. Sacco regularly communicated with his hedge fund customers by telephone and e-mail concerning specific trades, the flow of assets into and out of their accounts and the opening of new accounts. 9. Many of the mutual fund companies screened for market timing or excessive short-term trading by reviewing the FC identification numbers and account numbers associated with trades over a certain dollar amount. Typically, if a mutual fund company concluded that a particular trade placed by one of AG Edwards’ FCs violated its exchange limitations or restrictions against market timing, it would attempt to prevent additional trades in that mutual fund or mutual fund family by contacting AG Edwards and/or the registered FC who placed the trade. 10. Over time, Sacco and AG Edwards received at least 180 telephone calls, letters, e-mails and canceled trade notices (collectively “restriction notices”) from mutual fund 3 companies objecting to Sacco’s placement of market timing trades on behalf of his hedge fund customers. These restriction notices informed Sacco and AG Edwards that the fund companies had rejected particular trades or restricted Sacco and his hedge fund customers from placing further market timing trades. 11. 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 data and then sent copies of the restriction notices to Sacco and the Boston Back Bay branch of AG Edwards. 12. After receiving copies of the restriction notices, Sacco repeatedly ignored the mutual fund companies’ requests to cease trading and continued market timing on behalf of his hedge fund customers. In order to avoid further detection by the mutual fund companies, Sacco engaged in a series of deceptive acts and practices to conceal his continuing market timing activity from mutual fund companies. 13. For example, Sacco opened 142 separate accounts for his two hedge fund customers in the names of multiple entities affiliated with Hedge Fund A and Hedge Fund B in order to avoid further detection of the customers’ market timing activity. Sacco also transferred assets between the related accounts after he received restriction notices. 14. In addition, Sacco placed market timing trades on behalf of his hedge fund customers using several different FC identification numbers. 15. 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. A legitimate reason to request a new split FC number was to share commissions and fees with one or more additional FCs who serviced the same customer. In contrast, an illegitimate reason to obtain additional split FC numbers was to continue market timing mutual funds that previously restricted an FC from trading under other FC numbers or split FC numbers. Because many mutual fund companies restricted further trading by FC numbers rather than by FC names, an FC could evade restrictions by obtaining and trading under a new FC number. 16. Between May 2002 and September 2003, Sacco requested and obtained at least nine different split FC numbers with which to trade on behalf of his hedge fund customers. Most of the splits were with FCs and other individuals who did not do anything to service Sacco’s hedge fund customers and who received only 1% of the commissions or fees for trades executed under the split FC numbers. 17. By using these deceptive acts and practices, Sacco was able to disguise his identity and the identities of his hedge fund customers and thus, gain access to mutual funds that previously restricted him and his hedge fund customers from trading. 4 Violations 18. As a result of the conduct described above, Sacco 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 the offer and sale of securities and in connection with the purchase, offer, or sale of securities. Disgorgement and Civil Penalties 19. Respondent Sacco has submitted a sworn Statement of Financial Condition dated June 5, 2006 and other evidence and has asserted his inability to pay the entire amount of disgorgement plus prejudgment interest and a civil penalty. Undertakings In determining whether to accept Respondent Sacco’s Offer, the Commission has considered the following undertakings by Sacco: 20. Respondent Sacco shall cooperate fully with the Commission in any and all investigations, litigations or other proceedings relating to or arising from the matters described in this Order. In connection with such cooperation, Respondent Sacco has undertaken: a. To produce, without service of a notice or subpoena, any and all documents and other information reasonably requested by the Commission’s staff; b. To be interviewed by the Commission’s staff at such times as the staff reasonably may request and to appear and testify truthfully and completely without service of a notice or subpoena in such investigations, litigations, hearings or trials as may be requested by the Commission’s staff; and c. That in connection with any testimony of Respondent Sacco to be conducted at deposition, hearing or trial pursuant to a notice or subpoena, Respondent Sacco: i. Agrees that any such notice or subpoena for his appearance and testimony may be served by regular mail on his counsel, Daniel Rabinovitz, Esq., Michaels & Ward, LLP, 12 Post Office Square, Boston, MA 02109; and ii. Agrees that any such notice or subpoena for his appearance and testimony in an action pending in a United States District Court may be served, and may require testimony, beyond the territorial limits imposed by the Federal Rules of Civil Procedure. 5 IV. In view of the foregoing, the Commission deems it appropriate, and in the public interest, to impose the sanctions agreed to in Respondent Sacco’s Offer. Accordingly, pursuant to Section 8A of the Securities Act, Sections 15(b) and 21C of the Exchange Act and Section 9(b) of the Investment Company Act, it is hereby ORDERED that: A. Respondent Sacco cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. B. Respondent Sacco be, and hereby is barred from association with any broker or dealer, and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor or principal underwriter, with the right to reapply for association after two (2) years to the appropriate self-regulatory organization, or if there is none, to the Commission. C. Any reapplication for association by Respondent Sacco will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order. D. Respondent Sacco shall be ordered to pay disgorgement of $215,892.52 plus prejudgment interest of $56,978.70 for a total payment of $272,871.22, but based upon Respondent Sacco’s sworn representations in his Statement of Financial Condition dated June 5, 2006 and other documents submitted to the Commission, the payment of all but $15,000 of the disgorgement and prejudgment interest is waived and the Commission is not imposing a penalty against Respondent Sacco. Respondent Sacco shall pay disgorgement in the amount of $15,000 pursuant to the payment plan outlined below. E. Respondent Sacco shall pay $15,000 in 12 installments of $1,250.00 over a 36 month period to the United States Treasury. Sacco’s first payment of $1,250.00 shall be due thirty days after the date of entry of this Order and his remaining 11 payments shall be post-marked no later than the 30th of June, September, December and March of each year until December 30, 2009. Such payments 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 6 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 Charles Sacco 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. F. Respondent Sacco agrees that if the full amount of any payment described above is not made within ten (10) days following the date the payment is required by this Order, the entire amount of disgorgement, prejudgment interest and civil penalties, plus post judgment interest minus payments made, if any, is due and payable immediately without further application. G. The Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent Sacco provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of disgorgement and prejudgment interest and the maximum civil penalty allowable under the law. No other issue shall be considered in connection with this petition other than whether the financial information provided by Respondent Sacco was fraudulent, misleading, inaccurate or incomplete in any material respect. Respondent Sacco may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of disgorgement, interest and a penalty should not be ordered; (3) contest the amount of disgorgement and interest to be ordered or the imposition of the maximum penalty allowable under the law; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense. By the Commission. Nancy M. Morris Secretary 7
33-8798 May 2, 2007 Thomas C. Bridge, James D. Edge, and Jeffrey K. Robles Other Release Nos.: 34-55695, IC-27817 Note: See also the Order in this matter
United States Securities and Exchange Commission Securities Act of 1933 Release No. 8798 / May 2, 2007 Securities Exchange Act of 1934 Release No. 55695 / May 2, 2007 Investment Company Act of 1940 Release No. 27817 / May 2, 2007 Administrative Proceeding File No. 3-12626 In the Matter of Thomas C. Bridge, James D. Edge, and Jeffrey K. Robles On May 2, 2007, the United States Securities and Exchange Commission (Commission) issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Section 9(b) of the Investment Company Act of 1940 (Order) against Thomas C. Bridge (Bridge), James D. Edge (Edge) and Jeffrey K. Robles (Robles) (collectively, the Respondents). In the Order, the Division of Enforcement (Division) alleges that Bridge, a registered representative at the Boca Raton, Florida branch office of A.G. Edwards & Sons, Inc. (AG Edwards), violated certain provisions of the federal securities laws by using deceptive means to place market timing trades on behalf of a customer. The Division also alleges that Edge, the branch manager at AG Edwards’ Boca Raton and Lake Worth, Florida branch offices, failed reasonably to supervise Bridge. The Division further alleges that Robles, the branch manager at AG Edwards’ Boston Back Bay, Massachusetts branch office, failed reasonably to supervise Charles Sacco (Sacco), a former registered representative in that office who the Division alleges violated certain provisions of the federal securities laws by using deceptive means to place market timing trades on behalf of two customers. The Division alleges that Bridge willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Division also alleges that Edge and Robles failed reasonably to supervise Bridge and Sacco, respectively, with a view to preventing their violations of the federal securities laws. A hearing will be scheduled before an Administrative Law Judge to determine whether the allegations contained in the Order are true, to provide the Respondents an opportunity to dispute the allegations and to determine what sanctions, if any, are appropriate and in the public interest. The Commission directed that an Administrative Law Judge shall issue an initial decision no later than 300 days from the date of service of the Order, pursuant to Rule 360(a)(2) of the Commission’s Rules of Practice.
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. : : I. 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 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 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. 2 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. 3 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. 4 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 5 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. 6 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 7 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 8
UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55696 / May 2, 2007 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2605 / May 2, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12627 : : ORDER INSTITUTING CEASE-ANDIn the Matter of : DESIST PROCEEDINGS, MAKING : FINDINGS, AND IMPOSING A CEASE- : AND-DESIST ORDER PURSUANT TO Terry M. Phillips, : SECTION 21C OF THE SECURITIES : EXCHANGE ACT OF 1934 : R __e_s_p_o_n _d_e_n_t_. _ _ _____ _ _____ _ _____: : I. The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Terry M. Phillips (“Phillips” 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 him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 (“Order”), as set forth below. 2 III. On the basis of this Order and Respondent’s Offer, the Commission finds1 that: A. RESPONDENT Phillips, 48, of Midlothian, Virginia, is the founder, 20 percent owner and principal operator of Capitol Distributing, L.L.C. (“Capitol”) and the founder and 50 percent owner of Phillips Land Company (“PLC”). B. RELEVANT ENTITIES 1. Capitol is a privately-owned video game distributor organized as a limited liability company under the laws of the Commonwealth of Virginia. It was founded by Phillips in 1999. During the relevant period, Capitol had approximately ten employees. 2. PLC is a Virginia company 50 percent owned and principally operated by Phillips, has no employees and, in the ordinary course of business, has no involvement in the purchase, sale, or distribution of video games. 3. Take-Two Interactive Software, Inc. (“Take-Two”) is a Delaware corporation headquartered in New York, New York. Take-Two develops, markets and publishes interactive entertainment software games for the personal computer as well as video game consoles. Since July 31, 2006, Take-Two’s common stock has been registered with the Commission pursuant to Section 12(b) of the Exchange Act and currently trades on the NASDAQ NMS under the symbol “TTWO.” C. SUMMARY Take-Two and certain of its officers committed numerous violations of the anti-fraud, financial reporting and recordkeeping provisions of the federal securities laws to inflate reported revenue during fiscal years 2000 and 2001.2 Phillips was a cause of some of those violations which resulted from certain transactions between Take-Two, Capitol and PLC. Specifically, in four separate transactions with Capitol during that period, Take-Two fraudulently recorded as sales approximately $15 million in revenue 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. 2 On June 1, 2005, the Commission authorized and simultaneously settled civil actions in federal court against Take-Two and several present and former members of senior management, obtaining injunctions, disgorgement, civil penalties, and officer and director bars. The Commission also authorized, and simultaneously settled, an administrative cease-and-desist proceeding against one officer and a Rule 102(e)(3) administrative proceeding against the former Chief Financial Officer. 3 from shipments of games to Capitol that Capitol parked and subsequently returned without making any effort to sell. In two of the transactions, Capitol created invoices falsely describing the returns as “purchases” of “assorted product” by Take-Two from PLC. In those two transactions, Take-Two also provided the funds to Capitol or PLC that those entities then used to cover checks they wrote to Take-Two to purportedly “pay” for the games. Based on his participation in certain aspects of these transactions, Phillips was a cause of Take-Two’s violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1.3 D. FACTS 1. From October 31, 2000 through at least July 31, 2001, Capitol accepted several hundred thousand video games from Take-Two with the understanding that it would temporarily warehouse or “park” the games until a subsequent Take-Two reporting period, and then return the games to Take-Two. Take-Two improperly recorded and reported approximately $15 million in revenue associated with these parking transactions. 2. Phillips and Take-Two began discussing Capitol’s participation in the parking arrangement in July 2000. In an e-mail dated July 25, 2000, Phillips explained to two Capitol employees that “we can take whatever [Take-Two] needs to ship . . . f it is a huge amount we will need to find someplace to stick it . . . but it shouldn’t be a problem.” 3. In October 2000, Take-Two discussed the first parking transaction with Phillips. A Take-Two representative asked Phillips if he had another company that Take-Two could issue a purchase order to for the games in lieu of Capitol sending the games back as a return. Phillips mentioned PLC. Phillips instructed a Capitol employee to work out the details with the Take-Two representative. 4. On October 31, 2000, the last day of Take-Two’s fiscal year, Capitol accepted shipment of 230,000 video games from Take-Two with the understanding that Capitol would park them for a short time and then return the shipment to Take-Two. The games shipped to Capitol were selected by Take-Two based on Take-Two’s warehouse inventory at the time. Capitol had no input regarding the games it accepted. Take-Two improperly recorded $5.4 million as revenue from the shipment – the most revenue from a single sale that Take-Two had recognized up to that time. 3 Simultaneously with the issuance of this Order, Phillips, without admitting or denying the allegations of the complaint, has consented to a judgment in an action filed against Phillips and Capitol in the United States District Court for the District of Columbia ordering him to pay a civil penalty in the amount of $50,000. 4 5. Phillips knew that Capitol made no effort to sell the games. Instead, Capitol returned all 230,000 games to Take-Two over the next two reporting periods. When the games were returned, Capitol provided Take-Two with invoices that falsely described the games as purchases of “assorted product” from Phillips’ company PLC. Take-Two used those invoices to conceal in its books and records the fact that the October 31, 2000 “sale” had been returned in its entirety. PLC had no employees, no inventory, and did not distribute video games in the ordinary course of business. 6. Take-Two provided Capitol or PLC with money to make purported “payments” for the games to bolster the appearance that the shipments to Capitol were legitimate sales. For example, on December 20, 2000, Take-Two wired $2,557,239 to PLC. Six days later, PLC sent Take-Two a check for $2,557,137, purportedly in partial payment for the games associated with the October 31, 2000 transaction. 7. On February 28, 2001, Capitol accepted a second shipment of approximately 175,000 video games from Take-Two. Take-Two improperly recorded the transaction as a $4.6 million sale – second in revenue only to the October 31, 2000 transaction in Take-Two’s history up to that time. All 175,000 games were subsequently returned to Take-Two with invoices that again falsely described the return as a purchase of “assorted product” from PLC. Capitol again used funds provided by Take-Two to purportedly “pay” for the games. Take-Two wired Capitol $4,594,100 on April 26, 2001 and Capitol sent Take-Two a check for the same amount the next day. 8. On April 27, 2001, three days before the end of Take-Two’s second fiscal quarter, Capitol accepted approximately 55,000 games from Take-Two. Take-Two recorded $1.76 million as revenue from the purported sale. After the end of the quarter, Capitol returned all these games to Take-Two. 9. On July 31, 2001, the last day of Take-Two’s third fiscal quarter, Capitol accepted a shipment of more than 85,000 games from Take-Two. Take-Two recorded more than $3 million as revenue from the purported sale. After the end of the quarter, Capitol returned all these games to Take-Two. E. LEGAL ANALYSIS Section 21C(a) of the Exchange Act specifies that a respondent is a cause of another’s violation if the respondent knew or should have known that his act or omission would contribute to such violation. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe a variety of fraudulent practices. An issuer or individual may violate these provisions by either intentionally or recklessly making materially false or misleading statements in connection with the purchase or sale of securities. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). To violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, a defendant must act with scienter, Aaron v. SEC, 446 U.S. 680, 695, 701-02 (1980), which the Supreme Court has defined as “a mental state embracing intent to deceive, 5 manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976). Scienter of a company’s management is imputed to the company. See, e.g., SEC v. Manor Nursing Centers, 458 F.2d 1082, 1089-96 (2d Cir. 1972). Take-Two violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by using the transactions with Capitol to materially inflate its operating results, and by filing and releasing to the public periodic reports, registration statements and press releases that were materially false and misleading, and that misrepresented Take-Two’s financial condition. Based on his conduct described above, Phillips was a cause of Take- Two’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13 thereunder require all issuers with securities registered under Section 12 of the Exchange Act to file annual and quarterly reports on Forms 10-K and 10-Q respectively. Exchange Act Rule 12b-20 requires that, in addition to the information expressly required to be included in such reports, the issuer include such additional material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. The obligation to file these periodic reports includes the obligation to ensure that they are complete and accurate in all material respects. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). No showing of scienter is required to establish violations of these provisions. Id. at 1167. Information regarding the financial condition of a company is presumptively material. SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985). Take-Two violated Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13 thereunder when, as a result of the parking transactions with Capitol described above, it filed with the Commission materially false and misleading annual reports on Forms 10-K for the fiscal years ending October 31, 2000 and October 31, 2001, and quarterly reports on Forms 10-Q for the quarters ending April 30, 2001 and July 31, 2001, which contained inflated operating results. Based on his conduct described above, Phillips was a cause of Take-Two’s violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13 thereunder. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” Exchange Act Rule 13b2-1 prohibits direct or indirect falsification or causing falsification of books, records, or accounts subject to Section 13(b)(2)(A). No showing of scienter is required to establish violations of Exchange Act Section 13(b)(2)(A) (see SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 749 (N.D. Georgia 1983)) or Exchange Act Rule 13b2-1 (see SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998)). Take-Two failed to make and keep accurate books, records and accounts with respect to its transactions with Capitol. It also used those transactions to falsify its books and records. Based on his conduct described above, Phillips was a cause of Take-Two’s violations of Section 13(b)(2)(A) of the Exchange Act and Exchange Act Rule 13b2-1. 6 IV. In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Phillips’ Offer. Accordingly, it is hereby ORDERED that: Pursuant to Section 21C of the Exchange Act, Respondent Phillips shall cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5 and 13b2-1; and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13. By the Commission. Nancy M. Morris Secretary
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