United States Securities and Exchange Commission Securities Act of 1933 Release No. 7510 / February 26, 1998 Securities Exchange Act of 1934 Release No. 39701 / February 26, 1998 Investment Advisers Act of 1940 Release No. 1702 / February 26, 1998 Investment Company Act of 1940 Release No. 23048 / February 26, 1998 IN THE MATTER OF MONETTA FINANCIAL SERVICES, INC., ROBERT S. BACARELLA, WILLIAM M. VALIANT, PAUL W. HENRY AND RICHARD D. RUSSO, Administrative Proceeding File No. 3-9546 The Securities and Exchange Commission announced the entry of an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 (Securities Act), Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 (Exchange Act), Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act) and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (Investment Company Act) against Monetta Financial Services, Inc. (Monetta), a registered investment adviser located in Wheaton, Illinois, Robert S. Bacarella (Bacarella), president and a director of Monetta, and William M. Valiant (Valiant), Paul W. Henry (Henry) and Richard D. Russo (Russo), each of whom is a director of one of two mutual funds advised by Monetta. In the Order, the Division of Enforcement (Division) alleges that Monetta, Bacarella, Valiant, Henry and Russo willfully violated the antifraud provisions of the federal securities laws and that Henry willfully violated the personal securities transaction reporting provision of the Investment Company Act in connection with Monetta's allocation of profitable initial public offering (IPO) shares to the mutual fund directors in 1993. Specifically, the Division alleges that Monetta served as investment adviser to two registered investment companies, the Monetta Fund, Inc. (Monetta Fund) and the Monetta Trust (hereinafter collectively referred to as "the Funds"). The Division also alleges that Bacarella, Valiant and Russo have served as directors of the Monetta Trust since its inception in January 1993 and that Bacarella and Henry have served as directors of the Monetta Fund since its inception in May 1986. Further, the Division alleges that, between February 1993 and September 1993, Monetta received profitable short term trading opportunities in certain "hot" IPOs from broker-dealers underwriting those offerings. Such broker-dealers allocated the "hot" IPO shares to Monetta primarily as a result of brokerage business which Monetta had directed to those firms and the anticipation of additional brokerage business that would be generated by Monetta's clients. The overwhelming majority of this brokerage business was generated by the Funds. Furthermore, the Funds were legally and financially able to take advantage of the IPO opportunities. Monetta, pursuant to the direction of Bacarella, then re-allocated the IPO shares among its advisory clients. ======END OF PAGE 1====== The Division alleges that among Monetta's clients were Valiant and Russo, directors of the Monetta Trust, and Henry, a director of the Monetta Fund. In addition to allocating some of the IPO shares to the Funds, Monetta, through Bacarella, allocated profitable "hot" IPO shares to Valiant, Henry and Russo, who, in turn, accepted the allocations without disclosing the practice to the Funds' shareholders and obtaining the consent of disinterested representatives of the Funds. Within two days of the allocations, Monetta and Bacarella then sold (i.e., "flipped") the "hot" IPO shares, on behalf of Valiant, Henry and Russo. From the flipping of the IPO shares, Valiant, Henry and Russo received total profits of $51,822, or $12,812, $10,187, and $28,823 respectively. The Division further alleges that Monetta's allocation of such shares, through Bacarella, to the directors and the directors' receipt thereof, resulted in a number of conflicts of interest. For instance, Monetta's and Bacarella's allocation of "hot" IPO shares to the directors (which would tend to induce the Fund directors to be favorably disposed toward Monetta) without disclosing the practice to the Fund's shareholders and obtaining the consent of disinterested representatives of the Funds, when the Funds were legally and financially able to take advantage of the IPO allocations, resulted in a breach of Monetta's fiduciary duty as an investment adviser because it placed Monetta's own interests ahead of the interests of the Funds and their shareholders. Furthermore, Monetta's allocation of such shares, through Bacarella, to Valiant, Henry and Russo and the directors' receipt thereof, placed the Fund directors in a position where they, in conflict with their duty of loyalty to their Funds, received undisclosed benefits from the Funds' adviser. The receipt of the IPO shares from Monetta placed the directors in a position where their judgments and the exercise of their responsibilities to the Funds in general could be influenced by considerations of personal gain dispensed by Monetta. For example, the directors were responsible for reviewing whether Monetta's investment advisory services continued to be in the best interests of the Funds. Bacarella's and Monetta's allocation of "hot" IPO shares and the directors' receipt of such personal benefits from Monetta, however, would tend to compromise the directors' objectivity in evaluating Monetta's advisory services for the Funds. Because Monetta's IPO allocations created serious conflicts of interest for the directors in their review of the Funds' operations, the allocations constituted material information that was relevant to the operation of the Funds. Moreover, the Order alleges that Henry failed to report his IPO trades for the second quarter of 1993 as required by Rule 17j-1 of the Investment Company Act. Finally, the Division alleges that Monetta, Bacarella, Valiant, Henry and Russo willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; Monetta willfully violated, and Bacarella caused and willfully aided and abetted Monetta's violations of, Sections 206(1) and 206(2) of the Advisers Act; and Henry willfully violated Section 17(j) of the Investment Company Act and Rule 17j-1(c) promulgated thereunder. A hearing will be scheduled to determine if the Division's allegations are true and, if so, what remedial action is appropriate with regard to Monetta, Bacarella, Valiant, Henry and Russo, including the disgorgement of ill gotten gains and the imposition of ======END OF PAGE 2====== civil penalties. ======END OF PAGE 3======