UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7502 / January 30, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9540 _______________________________ : : In the Matter of :ORDER INSTITUTING :CEASE-AND-DESIST DEAN MCDERMOTT, :PROCEEDINGS PURSUANT STEPHEN COMPOS, AND :TO SECTION 8A OF THE DANIEL SHAFFER, :SECURITIES ACT OF 1933, :MAKING FINDINGS AND IMPOSING Respondents :CEASE-AND-DESIST ORDER : _______________________________: I. The Securities and Exchange Commission ( Commission ) deems it appropriate and in the public interest to institute cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ( Securities Act ) against Respondents Dean McDermott ( McDermott ), Stephen Compos ( Compos ), and Daniel Shaffer ( Shaffer ) (collectively Respondents ). II. In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement ( Offers ) to the Commission, 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 herein, except as to the jurisdiction of the Commission over the Respondents and over the subject matter set forth in this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings and Imposing Cease-and- Desist Order ( Order ) and as to Section III.A. below, which are admitted, Respondents McDermott, Compos, and Shaffer by their Offers consent to the entry of this Order and to the cease-and-desist order as set forth in Section IV., below. Accordingly, IT IS ORDERED that cease-and-desist proceedings pursuant to Section 8A of the Securities Act be, and they hereby are, instituted. ======END OF PAGE 1======. III. On the basis of this Order and the Offers submitted by Respondents McDermott, Compos, and Shaffer the Commission finds<(1)> that: A.Old Naples Securities, Inc. ("Old Naples ) was registered with the Commission as a broker-dealer from February 1986 until February 3, 1997, and was registered with the Commission as an investment adviser from May 1993 until February 3, 1997. James Zimmerman ("Zimmerman") was Old Naples' registered principal, sole owner and president from approximately March 1992 until January 1997.<(2)> From March 1992 until August 1996, Respondents McDermott and Compos were registered representatives of an Old Naples branch office located in Bethlehem, Pennsylvania. From May 1994 to August 1996, Respondent Shaffer was a registered representative of an Old Naples branch office located in Wyomissing, Pennsylvania. ZIMMERMAN S FRAUDULENT SCHEME B.From approximately May 1995 through August 5, 1996, utilizing Old Naples' legitimate broker-dealer business as a cover, Zimmerman, through Respondents, solicited and received approximately $4.8 million in funds from at least thirty-seven of Old Naples' customers, including Respondents. The Old Naples customers provided the funds for purported trading programs in municipal bonds. C.As part of the fraudulent scheme, all investors were led to believe that their investments would be made through Old Naples. However, instead of making the promised investments, Zimmerman deposited the funds into two checking accounts under his sole control, and did not record the receipt of the funds on Old Naples' books. D.Zimmerman conducted the fraudulent operation as a Ponzi scheme. He subsequently disbursed the customer funds: (a) to make periodic returns on investment to the defrauded investors; (b) to pay Old Naples' operational <(1)> The findings herein are made pursuant to Respondents Offers and are not binding on any other person or entity in this or any other proceeding. <(2)> On February 3, 1997, the Commission revoked Old Naples broker-dealer and investment adviser registrations and barred Zimmerman from association with any broker, dealer, municipal securities dealer, investment adviser or investment company. In re James Zimmerman and Old Naples Securities, Inc., Exchange Act Release No. 28227; Advisers Act Release No. 1613 (February 3, 1997). The Commission s action followed the entry of a final judgment of permanent injunction on January 24, 1997, enjoining Old Naples and Zimmerman from violations of Sections 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and also enjoining Old Naples from violations of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3 and 17a-5 thereunder. ======END OF PAGE 2======. expenses; and (c) for his personal expenses. RESPONDENTS PARTICIPATION IN ZIMMERMAN S FRAUDULENT SCHEME E.Respondents solicited from their brokerage customers approximately $4.8 million in investments and reinvestments for the purported bond trading programs that Zimmerman promoted. From approximately May 1995 through May 1996, Respondents McDermott and Compos solicited and raised $3.3 million in investments and reinvestments from approximately nineteen of their customers who maintained accounts at the Old Naples Bethlehem, Pennsylvania branch office. During the same period, Respondent Shaffer solicited and raised at least $1.5 million in investments and reinvestments from eighteen of his customers who maintained accounts at the Old Naples Wyomissing, Pennsylvania branch office. F.Based upon Zimmerman's representations to them, Respondents represented to their customers that: (a) their funds would be used for bond trading; (b) if bond transactions were completed, they would receive their principal plus a 7% return within thirty to forty-five days of making their investment; and (c) if bond transactions were not completed, their principal investment would be returned. Thus, all investors were led to believe that their investment was without any risk of loss to principal. G.Respondents solicited these investments from their customers based solely on Zimmerman's oral representations to them. Respondents conducted an insufficient investigation into these investments. H.Moreover, certain "red flags" that arose during the course of the scheme should have caused Respondents to investigate or question the bond investments in greater detail. For example, none of the Respondents adequately determined that Old Naples and Zimmerman could pay a 7% return to investors within a thirty to forty-five day period, an unusually high return compared to other investments available at the time, in that they did not adequately determine the existence of Old Naples purported credit facility to accomplish these trades and did not obtain or receive confirmations of the purported bond transactions. In addition, on one occasion several checks provided by Zimmerman to Respondents McDermott s and Shaffer s customers purportedly representing returns on their investments were returned for insufficient funds. Zimmerman subsequently covered these checks; nevertheless, despite this indication of wrongdoing, Respondents McDermott and Shaffer continued to recommend and sell and permit reinvestments in the bond investments, including for their own accounts, without conducting further inquiry regarding the returned checks. I.As securities professionals, Respondents had a duty independently to investigate the terms and merits of investments they recommended to their customers. Respondents could not merely accept their supervisor s representations even, as here, where the supervisor was president and chief compliance officer of the firm. A securities salesperson is under a duty to investigate and cannot ignore that which he has a duty to know and recklessly state facts about matters of which he is ignorant. See Hanly v. SEC, 415 F.2d 589, 595-97 (2nd Cir. 1969). This is particularly true when the investment involves securities promising very high returns over a short period, such as those Respondents recommended to their customers. ======END OF PAGE 3======. J.As described in Paragraphs III.A. to III.I. above, from approximately May 1995 to May 1996, Respondents committed or caused violations of Sections 17(a)(2)and (3) of the Securities Act, in that they, in the offer or sale of securities, by use of the means and instruments of transportation or communication in interstate commerce, and by the use of the mails, directly or indirectly, obtained money or property by means of untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading and engaged in transactions, practices or courses of business which operated as a fraud or deceit upon the purchasers of such securities. K.Respondent Shaffer has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest. The Commission has reviewed the sworn financial statement and other evidence provided by Respondent Shaffer and has determined that Respondent Shaffer does not have the financial ability to pay disgorgement of $90,000 plus prejudgment interest. IV. In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in the Offers. Accordingly, IT IS ORDERED, pursuant to Section 8A of the Securities Act, that: A.Respondents cease and desist from committing or causing any violation or any future violation of Sections 17(a)(2) and (3) of the Securities Act. B.Respondent Shaffer disgorge $90,000, representing ill-gotten gains he obtained as a result of the activities described in Section III., above, and prejudgment interest, but that payment of such amounts be waived based upon Respondent Shaffer s demonstrated financial inability to pay. C.The Division of Enforcement ( Division ) may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent Shaffer provided accurate and complete financial information at the time such representations were made; and (2) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent Shaffer s Offer of Settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Respondent Shaffer was fraudulent, misleading, inaccurate or incomplete in any material respect and whether any additional remedies should be imposed. Respondent Shaffer may not, by way of defense to any such petition, contest the findings in this Order or the Commission s authority to impose additional remedies that were available in the original proceedings. By the Commission. ======END OF PAGE 4======. Jonathan G. Katz Secretary