COMMODITY FUTURES TRADING COMMISSION

In the Matter of: JERRY W. SLUSSER, FIRST REPUBLIC FINANCIAL CORPORATION, FIRST REPUBLIC TRADING CORPORATION, HANS J. BRINKS, EDWARD T. HAMLET, and CANTOR FITZGERALD & CO., Respondents.

CFTC Docket No. 94-14
January 28, 1997


ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AS TO RESPONDENT CANTOR FITZGERALD & CO.

By the Commission

OPINION:

I.

On May 25, 1994, the Commodity Futures Trading Commission ("Commission") filed a Complaint and Notice of hearing against Cantor Fitzgerald & Co. ("Cantor"), among others. The Complaint charges, inter alia, that Cantor aided and abetted violations of Sections 4o(1)(B) and 4m(1) of the Commodity Exchange Act, as amended ("Act") .

II.

Cantor has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Without admitting or denying the findings herein, and prior to any adjudication on the merits, Cantor acknowledges service of this Order Making Findings and Imposing Remedial Sanctions ("Order"). Cantor consents to the use of the findings contained in this Order in this proceeding and in any other proceeding brought by the Commission or to which the Commission is a party. n1

n1 Cantor does not consent to the use of the Offer or this Order as the sole basis for any other proceeding brought by the Commission. Nor do they consent to the use of the Offer or this Order by any other party in any other proceeding. The findings contained in this Order are not binding on any other person or entity named as a defendant or respondent in this or any other proceeding. [*2]

III.

The Commission finds the following:

A. RESPONDENT

Respondent Cantor Fitzgerald & Co., a New York partnership with its principal place of business at 1840 Century Park Plaza, Ninth Floor, Los Angeles, California 90067, has been registered since 1982 with the Commission as a futures commission merchant ("FCM"), pursuant to Sections 4d and 4f of the Act. Until 1992, Cantor was known as Cantor Fitzgerald & Co., Inc., a California corporation. Cantor has been registered continuously as a broker-dealer with the Securities and Exchange Commission ("SEC") from February 1946 to the present.

B. OTHER RELEVANT INDIVIDUALS AND ENTITIES

Jerry W. Slusser ("Slusser") currently resides at 4118 N. Meridian St. Indianapolis, Ind. 46208. During 1989, Slusser resided in Indianapolis, Indiana. Slusser was the sole shareholder of Vancorp, an Indiana corporation, which was the sole shareholder of First Republic Financial Corporation, which in turn was the sole shareholder of First Republic Trading Corporation and First Republic Securities. In addition, Slusser was an eighty percent shareholder of the Sterling International Bank, Ltd. ("Sterling"). During 1989, Slusser was [*3] chairman of the board of each of these entities. Slusser has been registered with the Commission as an associated person ("AP") of First Republic Trading Corporation since September 9, 1990, pursuant to Section 4k(1) of the Act.

First Republic Financial Corporation, an Indiana corporation located at 951 N. Delaware Street, Indianapolis, Indiana 46202, was known as Vancorp Financial Services ("VFS") until December 18, 1989. First Republic Financial Corporation will be referred to as VFS in this Order. VFS has never been registered with the Commission in any capacity.

First Republic Securities ("FRS"), an Indiana corporation also located at 951 N. Delaware Street, Indianapolis, Indiana 46202, was acquired by VFS as a wholly owned subsidiary on June 9, 1989. Prior to June 9, 1989, it had no known relationship with VFS. During 1989, FRS was registered with the SEC as a nonclearing broker-dealer.

First Republic Trading Corporation, an Indiana corporation also located at 951 N. Delaware Street, Indianapolis, Indiana 46202, was acquired by VFS as a wholly owned subsidiary on July 13, 1989. Prior to July 1989, it had no known relationship with VFS and was a Tennessee corporation [*4] known as CMW Inc. ("CMW"). First Republic Trading has been registered with the Commission as an introducing broker ("IB") since November 10, 1987, pursuant to Sections 4d and 4f of the Act.

Edward T. Hamlet ("Hamlet") currently resides at 620 Phillips Dr., Boca Raton, Florida 33432. He was vice-president of VFS from at least May 1989 until October 1990. He was registered as an AP of First Republic Trading, pursuant to Section 4k(1) of the Act, from November 14, 1989 until September 14, 1990. Hamlet also was registered with the Commission as a commodity pool operator ("CPO"), pursuant to Section 4m(1) of the Act, from February 28, 1990 to May 1, 1991. Hamlet's business address for his CPO operations was 951 N. Delaware Street, Indianapolis, Indiana 46202.

Hans Jurgen Brinks ("Brinks"), a citizen of Germany, whose last known address is Passauer Strasse 8-9, 10789 Berlin, Germany. From at least January 1, 1989 through April 5, 1989, Brinks was chief operating officer of VFS. He was president of VFS from April 1989 until his resignation in 1990. Brinks has never been registered with the Commission in any capacity.

C. FACTS

1. FFS and the IPC Funds

From 1987 through [*5] at least July 1989, International Participation Corporation ("IPC"), a California corporation, raised approximately $ 50 million from approximately 6,000 participants ("IPC participants") for investment in at least two different commodity pools, known as IPC Fund III and IPC Fund IV ("IPC Funds"). Most of the IPC participants were residents of Germany, with other participants residing in Switzerland and Liechtenstein. No disclosure documents were ever filed with the Commission on behalf of the IPC Funds.

IPC participants were to receive 65% of the income earned from trading financial futures, with the remaining 35% to be paid to IPC. All of IPC's operating expenses beyond the subscription premium were to be paid out of this 35% share of the profits. The IPC Prospectus stated that IPC Fund III was to cease trading when trading produced a loss of participation capital equivalent to a maximum of 10% and the IPC Fund IV was to cease trading when trading produced a loss of participation capital equivalent to a maximum of 35%.

Pursuant to an agreement dated May 31, 1989, VFS agreed to manage the IPC Funds. IPC assigned all of its rights, title and interest in management and "investment/contracts/responsibilities" [*6] to VFS, and VFS agreed "to accept all management and investing contracts responsibilities and rights." Between February 28, 1989 n2 and July 14, 1989, VFS received approximately $29 million from the IPC Funds and IPC participants (hereinafter referred to as "IPC money").

n2 VFS also received IPC money pursuant to an agreement dated February 13, 1989.

On June 9, 1989, VFS purchased First Republic Securities, an entity registered with the SEC as a nonclearing broker-dealer.

2. The VFS Cantor Account

On or about May 25, 1989, VFS, using IPC money, opened two securities trading accounts in its own name at Cantor (hereinafter referred to as the "VFS Cantor account"). n3 At the time that VFS opened the VFS Cantor account, Slusser represented to Cantor "that no one other than the undersigned [VFS] had an interest in the account." The purpose of the VFS Cantor account was to maximize earnings on money "swept" out of the commodity interest accounts held by other FCMs on a daily basis by investing such money in securities. Cantor was given instructions to wire funds to VFS's commodity interest accounts at other FCMs to meet margin calls.

n3 VFS did not maintain any commodity trading accounts at Cantor. [*7]

On or before June 20, 1989, Slusser and Hamlet informed the former Cantor registered representative handling the account that the money in the VFS Cantor account was "pooled money" which VFS was managing pursuant to various contracts and agreements.

Cantor knowingly assisted VFS in operating as an unregistered CPO. The former registered representative informed Cantor's former Chief Financial Officer, who requested that VFS inform Cantor in writing:

. . . . As we do not disclose the identity of our clients to you, all transactions will take place in our accounts. . . . n4
n4 Commission Regulation 4.20 requires CPOs to operate a commodity pool as an entity cognizable as a legal entity separate from that of the CPO, unless the Commission has found that the CPO is exempt from this requirement. In addition, Regulation 4.30 prohibits commodity trading advisors ("CTAs") from accepting or receiving client funds, securities or other property in the CTA's name, to purchase, guarantee or secure any commodity interest of the client. [*8]

On June 20, 1989, VFS returned to Cantor a letter with this representation. VFS also informed Cantor, in writing, that it was not registered as an Investment Advisor under the Investment Advisors Act of 1940 and that it did not maintain records required by that Act. At or about the same time, Hamlet informed Cantor that the funds in the account came from a number of small investors.

Even though Cantor was aware or should have been aware that VFS falsely represented the ownership of the account when the account was opened, Cantor took no steps to identify the names of VFS's clients. Rather it allowed VFS to trade the VFS Cantor account in its own name. Cantor's compliance manual in use in 1989 specifically addressed the handling of accounts managed by third parties. The compliance manual required in pertinent part:

No orders shall be accepted from third parties without a power of attorney or a trading authorization in our files at the time of the entry of such order. . . .

With respect to accounts introduced to the firm by investment advisors, the relevant rules permit us to deal directly with the investment advisor in this regard when the advisor informs us that he has a written trading authorization on file as to the client in question and he forwards a sample of his firm's authorization for our files.
Cantor never received a power of attorney or written trading authorization for the IPC Funds or a sample of VFS's trading authorization. Furthermore, Cantor had no basis to believe that VFS was an investment advisor operating under the "relevant [*9] rules." Cantor made no inquiry as to whether VFS was registered in any capacity with any regulatory organization, including the Commission.

In June 1989, Hamlet informed Cantor that the VFS Cantor account was being traded in conjunction with commodity accounts at other FCMs as part of an overall strategy. From some time in July 1989, Cantor reported to a representative of VFS on a daily basis to assist VFS in figuring the daily value of all cash and securities positions at Cantor. In addition, in mid-July 1989, the registered representative handling the account attended a meeting at VFS' offices in Indianapolis and gave a presentation to a group of salesmen who had raised money for the IPC Funds concerning the trading in the VFS Cantor account.

3. Cantor's Participation in VFS's Transfer of Funds to First Republic Securities

Between June 27 and September 22, 1989, Cantor assisted VFS in obtaining funds to which it was not entitled by wiring over $950,000 out of the free credit balance in the VFS Cantor account to FRS's bank account. On June 27, 1989, Slusser requested that Cantor pay "accumulated fees" to FRS. Cantor figured the accumulated fees requested by Slusser to be [*10] $ 298,750 by applying the formula that Cantor used to determine its "markups" and "markdowns" on transactions. According to Cantor's customary practice, markups and markdowns are never separate charges to an account, but rather are integrated in the price paid or received by the customer for securities bought or sold. Moreover, FRS had not introduced VFS to Cantor and there was not a clearing agreement between FRS and Cantor. Nevertheless, on June 27, 1989, Cantor wired this amount from the free credit balance in the VFS Cantor account to FRS' bank account. On August 8, 1989, Slusser requested Cantor to wire $ 198,093 to the bank of account of FRS. On August 8, 1989 Cantor wired this amount from the free credit balance in the VFS Cantor account to FRS's bank account.

On or about July 15, 1989 Slusser learned that in order for FRS to earn commissions on the VFS Cantor accounts, FRS must have a clearing agreement with Cantor. Slusser then unsuccessfully attempted to obtain a backdated clearing agreement.

Cantor entered into a clearing agreement with FRS dated August 12, 1989. Despite this clearing agreement, Cantor did not clear any trades for FRS. Nevertheless, Cantor thereafter wired [*11] money directly from the free credit balance in the VFS Cantor account to FRS's bank account at Slusser's request. Pursuant to such a request, Cantor wired to FRS $253,906 on August 31, 1989.

On or about September 15, 1989 Slusser informed Cantor that the wires out of the free credit balances in the VFS Cantor account to the bank account of FRS were coming to them improperly. On September 19, 1989, Cantor orally informed VFS that it was putting the VFS Cantor account on a liquidation only status, and confirmed this in writing on September 20, 1989. Nevertheless on September 22, 1989, Cantor wired another $198,750 from the free credit balance in the VFS Cantor account to the FRS account.

The funds wired to FRS by Cantor were utilized by VFS in its operations. Cantor's commission income on the VFS Cantor account was not reduced by these payments to FRS.

The VFS Cantor account constituted one of Cantor's largest accounts in terms of the amount of trading in the account. It was also the registered representative's largest account and one of the largest accounts in the Investment Strategies Group of Cantor.

IV.

FINDINGS OF VIOLATIONS

Solely on the basis of consent evidenced [*12] by the Offer, and without any adjudication on the merits, the Commission finds that Cantor aided and abetted violations of Sections 4m(1) and 4o(1)(B) of the Act.

V.

OFFER OF SETTLEMENT

Cantor has submitted an Offer of Settlement in which, without admitting or denying the findings herein, it: admits the jurisdiction of the Commission with respect to the matters set forth herein; waives: 1) a hearing; 2) all post-hearing procedures; 3) judicial review by any court; 4) any objection to the staff's participation in the Commission's consideration of the Offer; and 5) any claim of a punitive penalty based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein; stipulates that the record basis on which this Order is entered consists solely of this Order and the findings consented to in the Offer which is incorporated in this Order; and consents to the Commission's issuance of the Order, which makes findings, as set forth above, and orders Cantor to cease and desist from violating the provisions of the Act it has been found to have violated, and orders Cantor to pay a civil monetary penalty of $ 500,000 and to comply with the undertakings [*13] set forth below. In addition, without admitting or denying the allegations of the Complaint, Cantor waives all rights which it may possess under the Equal Access to Justice Act, 5 U.S.C. 504 (1994) and 28 U.S.C. 2412 (1994), as amended by Pub. L. No. 104-121, 231-32, 110 Stat. 862-63, and Part 148 of the Commission Regulations, 17 C.F.R. 148.1 et seq., relating to, or arising from this action.

VI.

ORDER

Accordingly, IT IS HEREBY ORDERED THAT:

1. Cantor shall cease and desist from violating Sections 4m(1) and 4o(1)(B) of the Act.

2. Cantor shall pay a civil penalty of $500,000.

3. Cantor shall comply with the following undertakings:

a. Cantor shall retain at its expense, within 30 days of the entry of this Order, an independent consultant acceptable to the Commission to review and make recommendations concerning Cantor's compliance policies and procedures related to accounts, introduced to (85,1)" >Cantor or opened at Cantor by persons acting in the capacity of CPOs or CTAs as defined by the Act, or persons who Cantor has reason to believe are acting in such capacities, in which funds or securities are deposited with Cantor (whether deposited when the account [*14] is opened or thereafter). Such recommendations shall, among other things, be designed to ensure that: 1) Cantor has written identification of the actual owner of each such account; 2) such accounts are carried in compliance with Commission Regulations 4.20 (a)(1) and 4.30; 3) Cantor has written trading authorizations granted by the actual owner of each such account; 4) Cantor has written authorizations granted by the actual owner of each such account to transfer funds to accounts of third parties; 5) Cantor has written verification that the CPOs or CTAs are registered with the Commission or are not required to be registered before trading in securities or commodity interests begins.

b. Cantor shall cooperate fully with the consultant, including obtaining the cooperation of Cantor employees or other persons under its control. Cantor shall place no restrictions on the consultant's communication with the Commission staff.

c. Cantor shall require the consultant, at Cantor's expense, to prepare a report setting forth his or her findings, analysis and recommendations as to the matters described in paragraph 3a above.

d. Cantor shall require the consultant to deliver the report within [*15] three months after the issuance of this Order to (i) Cantor, and (ii) Commission staff, which may make such further use thereof as it may in its discretion deem appropriate.

e. Cantor shall adopt all recommendations by the consultant in the report within six months after its issuance; provided, however, that as to any of the consultant's recommendations that Cantor determines is unduly burdensome or impractical, Cantor may suggest an alternative procedure designed to achieve the same objective, submitted in writing to the consultant and to the Commission staff. The consultant shall reasonably evaluate >Cantor's alternative procedure. Cantor will abide by the consultant's determination with regard thereto and adopt those recommendations deemed appropriate by the consultant. (105,1)" >Cantor shall, within six months after the issuance of the consultant's report, in a letter to Commission staff, attest to, and set forth the details of, its implementation of the recommendations contained in the report.

f. Cantor shall employ at its own expense an outside compliance auditor acceptable to the Commission to review Cantor's adherence to the procedures adopted pursuant to paragraphs 3a-e, and to provide [*16] reports every six months, from the date of their implementation, on Cantor's compliance with these procedures for a period of two years. The outside compliance auditor shall also deliver the periodic reports to the Commission staff, which may make such further use thereof as it may in its discretion deem appropriate.

g. Cantor shall establish a line of authority and implement procedures as set forth in paragraph 3a above that provide for the Director of Compliance to report directly, and on a regular basis, to Cantor's Senior Vice-President of Administration, who is responsible for the day to day operations of the firm.

h. Cantor shall implement procedures that will require the Director of Compliance to review Cantor's adherence to the procedures adopted pursuant to paragraphs 3a-e, and to provide periodic reports on Cantor's compliance with these procedures to Cantor's Senior Vice-President of Administration.

i. Cantor shall cooperate with the staff of the Commission in such further investigations and inspections as the Commission shall determine to pursue relating to accounts introduced to Cantor or opened at Cantor by persons acting in the capacity of CPOs or CTAs arising out [*17] of or relating to conduct which occurred before the date of the Offer. Furthermore, Cantor shall actively seek the cooperation of all employees, agents and representatives of Cantor in any such investigation or inspection. At the request of the Commission's staff, Cantor shall appear and testify, and shall use its best efforts to obtain the appearance and testimony of its employees, agents and representatives, at any investigative testimony, deposition, hearing or trial.

Unless otherwise specified, the provisions of this Order shall be effective on this date.

By the Commission.