UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36845 / February 14, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8947 --------------------------- ORDER INSTITUTING In the Matter of : PUBLIC PROCEEDINGS, : MAKING FINDINGS AND Westcap Securities, L.P., : IMPOSING REMEDIAL Respondent. : SANCTIONS : : --------------------------- I. The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act) against Westcap Securities, L.P. (Westcap). In anticipation of the institution of these administrative proceedings, Westcap has submitted an Offer of Settlement (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 in which the Commission is a party, and without admitting or denying the findings contained in this Order, except as to jurisdiction and the facts set forth in Paragraph II.1 below, which it admits, Westcap consents to the entry of this Order, its findings and the imposition of sanctions as set forth below. ACCORDINGLY, IT IS ORDERED THAT proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act be, and they hereby are, instituted. II. On the basis of this Order and the Offer submitted by Westcap, the Commission finds-[1]- that: 1. Westcap is a broker-dealer registered with the Commission pursuant to Section 15 of the Securities Exchange Act ---------FOOTNOTES---------- -[1]- The findings herein are pursuant to Respondent Westcap's Offer of Settlement and are not binding on any other person or entity named in this matter or in any other proceeding. ==========================================START OF PAGE 2====== of 1934 (Exchange Act). At the end of fiscal year 1993, Westcap had 10,351 customer accounts. Westcap filed a Form BDW on December 20, 1995. 2. From in or about March 1993 through February 1994, certain registered representatives of Westcap offered and sold Real Estate Mortgage Investment Conduits (REMICs). REMICs are derivatives of mortgage-backed securities and are often issued by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).-[2]- REMICs restructure interest and principal payments from mortgage- backed securities into various classes, or "tranches," which pay the principal and interest cash flows from the mortgage pool to investors in the tranches according to different rules which are disclosed in the prospectus provided by the issuers. These tranches have varying degrees of sensitivity to fluctuations of interest rates. Due to their sensitivity to interest rates, certain securities sold by Westcap to seven of its customers carried risks, including market, extension and liquidity risks. In the process of selling to seven customers, certain registered representatives associated with Westcap intentionally made material misrepresentations and/or omissions that rendered other statements materially false or misleading regarding the risks associated with investing in REMICs, including but not limited to, market, extension and liquidity risks. In these seven cases, the registered representatives had the requisite scienter because they did not have any reason to believe that the seven customers had obtained materials and disclosure information from other sources concerning the risks involved in investing in REMICs so as to make the statements actually made not misleading. 3. During the relevant period, one Westcap registered representative provided a written misrepresentation to a municipal customer concerning the safety and liquidity of a REMIC security. In informational material provided to that customer, the registered representative described an inverse floater with a 5% floor as a "conservatively designed bond" that was "well ---------FOOTNOTES---------- -[2]- A REMIC security represents an interest in the cash flows of a pool of mortgages. REMIC securities may include numerous classes or "tranches," which have different payment characteristics, such as final maturity dates and priority in payment of principal and interest. Principal payments made be made serially, first to the class with the earliest stated maturity, until it is retired, and next to the class with the next stated maturity, until the debt is entirely extinguished. In the alternative, principal payments may be allocated among classes to ensure stability of repayment rate, often called planned amortization classes ("PACs"), resulting in greater variability in payment of support classes. ==========================================START OF PAGE 3====== suited for the investment manager that is very concerned with interest-rate risk."-[3]- 4. Moreover, during the same period, certain Westcap registered representatives traded one of the above mentioned customer accounts in an excessive manner, using discretionary authority, in order to maximize commissions from the account. Annualized turnover in that account was 13.28 and commissions, as a percent of average equity, was 24.83%. The customer in this account orally provided discretionary authority to the registered representatives who serviced the account.-[4]- Westcap had a policy prohibiting the use of discretionary authority in customer accounts. 5. As a result of the activity described in Paragraphs II.2-4, certain registered representatives of Westcap willfully violated Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, by making material misrepresentations and/or omissions that rendered other statements materially false or misleading in connection with the offer and sale of securities to seven Westcap customers. 6. During the relevant period, Westcap failed reasonably to supervise its registered representatives with a view toward preventing the violations described in Paragraphs II.2-4 above because of certain deficiencies in its compliance procedures. In particular, Westcap did not have adequate procedures to ensure that its registered representatives disclosed accurate and complete information regarding the risks of investing in REMICs, including market, extension and liquidity risks. In addition, Westcap lacked adequate procedures to review the correspondence and materials sent to customers by Westcap's registered representatives regarding the risks of investing in REMICs and the characteristics of the securities being sold. 7. During the relevant period, Westcap's compliance officer noted unusually active trading in the customer account described above in Paragraph II.4. He reported the activity to Westcap's compliance committee. 8. Although Westcap had a policy requiring the compliance director at least quarterly to review samples of customer ---------FOOTNOTES---------- -[3]- Inverse floaters are tranches that pay interest each month pursuant to a set formula. According to the formula, interest payments adjust inversely with changes in an interest rate index such as the London Interbank Offered Rate (LIBOR) or the Cost of Funds Index (COFI). -[4]- This customer has settled its claims with Westcap. ==========================================START OF PAGE 4====== accounts and consult with salespersons, customers, and managers about questions and concerns regarding account activity, Westcap management prohibited members of the department from consulting with customers directly in 1993. 9. Based on the facts as described in Paragraphs II.6-8, Westcap failed reasonably to supervise its registered representatives with a view toward preventing the violations described above in Paragraph II.5. III. In view of the foregoing, including Westcap's filing of a Form BDW, it is in the public interest to impose sanctions specified in the Offer of Settlement. Accordingly, IT IS ORDERED: 1. THAT Westcap's registration with the Commission be revoked; 2. THAT Westcap pay to the Commission, within 30 business days after the entry of the Order, (i) disgorgement in the amount of $445,340.60; (ii) prejudgment interest in the amount of $83,878.90; and (iii) civil money penalty in the amount of $300,000. Such payments shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Comptroller, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (3) submitted under cover letter which identifies Westcap 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 Randall J. Fons, Securities and Exchange Commission, Midwest Regional Office, 500 W. Madison Street, Suite 1400, Chicago, Illinois, 60661-2511. By the Commission. Jonathan G. Katz Secretary