==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. LITIGATION RELEASE NO. 14865 / April 9, 1996 In the Matter of GRUNTAL & CO., INCORPORATED and GRUNTAL FINANCIAL CORP., Administrative Proceeding File No. 3-8984 SECURITIES AND EXCHANGE COMMISSION v. GRUNTAL & CO., INCORPORATED and GRUNTAL FINANCIAL CORP., 96 Civ. 2514 (MBM) (S.D.N.Y. 1996) SECURITIES AND EXCHANGE COMMISSION v. EDWARD E. BAO, 96 Civ. 2515 (MBM) (S.D.N.Y. 1996) In the Matter of GRUNTAL & CO., INCORPORATED, Administrative Proceeding File No. 3-8983 The Securities and Exchange Commission ("Commission") today instituted and simultaneously settled administrative proceedings against Gruntal & Co., Incorporated ("Gruntal"), a registered broker-dealer, and Gruntal Financial Corp. ("Gruntal Financial"), which operates a brokerage business through Gruntal, its wholly owned subsidiary, and was a public reporting company from 1983 to 1987. In addition, the Commission today filed a complaint in U.S. District Court for the Southern District of New York against Edward E. Bao ("Bao"), a former executive vice president and director of both Gruntal and Gruntal Financial. GRUNTAL AND GRUNTAL FINANCIAL SETTLE CHARGES OF SECURITIES LAW VIOLATIONS IN CONNECTION WITH DIVERSIONS OF CUSTOMER AND OTHER THIRD PARTY ASSETS In the first of two separate administrative Orders issued today, the Commission found that Gruntal and Gruntal Financial violated the antifraud, reporting, and books and records provisions of the federal securities laws in connection with three separate schemes to divert assets that occurred between 1984 and 1994 and that were instituted by certain members of Gruntal senior management (who are no longer associated with the firm). Simultaneous with the institution of the administrative proceeding, and without admitting or denying the findings contained therein, Gruntal and Gruntal Financial consented to the issuance of the Commission Order which, among other remedial sanctions, orders Gruntal and Gruntal Financial to disgorge $5.5 million and Gruntal to pay a civil penalty of $4 million. ==========================================START OF PAGE 2====== ==========================================START OF PAGE 3====== The Findings The Commission Order finds that, among other things, beginning in 1984 and continuing for a decade, certain members of Gruntal senior management intentionally diverted securities and funds totaling over $11 million from customer accounts, customer and vendor checks, dividend overages, and other sources at Gruntal. Also beginning in 1984, certain senior managers at Gruntal opened securities accounts at Gruntal under fictitious customer names. Approximately $5 million of the diverted assets were moved to the fictitious customer accounts and then transferred to Gruntal's profit and loss accounts or used to make off-books payments of Gruntal expenses. The remaining $6 million of the diverted assets were embezzled by certain of the members of Gruntal senior management implementing the schemes. The Order also finds that, in furtherance of these schemes, the senior Gruntal managers implementing the diversions falsified Gruntal's books and records. Other books and records, although not intentionally falsified, were based upon information contained in the falsified records and therefore were inaccurate. As a result of the diversions, Gruntal filed periodic FOCUS reports that overstated firm income, and Gruntal Financial filed false and misleading periodic reports and a false and misleading registration statement that mischaracterized the diverted assets and misstated Gruntal Financial's income. Gruntal Financial's filings also failed to disclose the involvement of certain senior officers and managers in the diversions of customer and other third party assets to income. The Order finds that Gruntal Financial violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder. The Order further finds that Gruntal willfully violated Section 17(a) of the Securities Act and Sections 10(b), 15(c)(1), 17(a), and 17(e) of the Exchange Act and Rules 10b-5, 17a-3, 17a-4, 17a-5(a), 17a- 5(d), and 17a-11(d) thereunder, and willfully aided, abetted, and caused Gruntal Financial's violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a- 13, and 13b2-1 thereunder. The Remedial Sanctions In addition to other remedial sanctions, the Order: ù censures Gruntal; ù orders Gruntal and Gruntal Financial to cease and desist from committing or causing any violation, and ==========================================START OF PAGE 4====== any future violation, of the antifraud and other provisions of the federal securities laws; ù requires Gruntal to pay a civil penalty of $4 million; ù requires Gruntal and Gruntal Financial to pay $5.5 million in disgorgement and prejudgment interest; ù requires Gruntal and Gruntal Financial to hire an independent person to verify Gruntal's representation that it has already repaid, recredited, escheated, or properly segregated and scheduled for escheatment an additional $6.7 million in connection with the conduct described in the Commission's Order; and ù requires Gruntal and Gruntal Financial to hire an independent consultant to (1) conduct a thorough review of Gruntal's policies and procedures concerning, among other things, its back office operations and compliance, and (2) investigate Gruntal's order execution and reporting practices for Over-The-Counter ("OTC") securities transactions. It also requires Gruntal and Gruntal Financial, from their own funds, to directly reimburse any customer identified by the independent consultant as having been harmed by Gruntal's OTC trading practices. In connection with the Commission's Order, the Commission today filed a petition in U.S. District Court for the Southern District of New York seeking a court order establishing a disgorgement and distribution process administered by an independent person subject to the control of the Court. Gruntal and Gruntal Financial each consented to the entry of such an order. The Commission's investigation in this matter is continuing as to other entities and individuals. The Commission acknowledges the assistance of the New York Stock Exchange, Inc. in this matter. COMPLAINT FILED AGAINST BAO The complaint filed in District Court against Bao alleges violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder in connection with the scheme to divert assets to Gruntal's profit and loss accounts. The Commission's complaint alleges that Bao conceived of and directed the scheme to divert assets from customer accounts, customer and vendor -4- ==========================================START OF PAGE 5====== checks, unclaimed dividends, and other sources at Gruntal to the fictitious accounts, and from there to Gruntal's profit and loss accounts. In addition, the Commission's complaint alleges that Bao violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by engaging in illegal trading in connection with the sale of Gruntal Financial securities. In 1987, after the scheme had been in operation for approximately three years, Bao sold 582,000 shares of Gruntal Financial common stock for his own account and also sold another 36,000 shares he controlled as trustee. According to the complaint, in connection with those sales, Bao made certain affirmative material misrepresentations and he sold the Gruntal Financial stock while in possession of material non-public information concerning the diversion scheme, his and other senior Gruntal managers involvement in it, and Gruntal Financial's overstatements of income. The Commission's complaint seeks a permanent injunction, an order permanently barring Bao from acting as an officer or director of any public company, and an order requiring Bao to disgorge his illegal trading profits and losses avoided, and prejudgment interest thereon. GRUNTAL SETTLES CHARGES OF SECURITIES LAW VIOLATIONS IN ITS INVESTMENT ADVISORY BUSINESS In a separate matter, the Commission also announced that it instituted and simultaneously settled public administrative and cease-and-desist proceedings against Gruntal involving securities law violations arising principally from Gruntal's investment advisory business. Without admitting or denying the Commission's findings, Gruntal agreed to pay a $1 million civil penalty and consented to issuance of an Order directing that Gruntal cease and desist from future violations, pay disgorgement in amounts to be determined, and adopt various remedial procedures. The Order makes findings concerning five areas of violative conduct: ù Between January 1993 and November 1995, Gruntal executed at least 8,813 transactions for advisory clients on a principal basis or by crossing advisory client orders with orders for other Gruntal customers. These transactions were contrary to the disclosure in Gruntal's filings with the Commission, and in many instances violated the notice and consent requirements of the Investment Advisers Act of 1940 ("Advisers Act"). -5- ==========================================START OF PAGE 6====== ù Gruntal charged commissions, commission equivalents, mark-ups and mark-downs on transactions for certain advisory clients who had chosen to pay an all- inclusive, asset-based fee, contrary to statements in Gruntal's filings with the Commission and brochures provided to clients. ù Gruntal sent trade confirmations to advisory clients and other brokerage customers wrongly identifying certain principal transactions as agency transactions. ù From March 1995 through November 1995, Gruntal failed to disclose to its advisory clients that it received payment for directing order flow to two affiliated broker-dealers. ù Gruntal failed to maintain accurate records concerning the capacity in which it executed transactions. The Order also makes the following findings: During an examination conducted in late 1992, the Commission's staff detected improper principal and agency cross transactions, and so informed Gruntal in a deficiency letter in January 1993. In its response letter to the staff, Gruntal represented that it was adopting review procedures and a special order ticket for advisory client trades to ensure that these practices ceased. Thereafter, Gruntal failed to institute adequate procedures, never used the new order ticket, and executed at least 8,813 violative transactions. The Order finds that Gruntal violated Section 17(a) of the Securities Act; Sections 10(b), 15(c) and 17(a) of the Exchange Act and Rules 10b-3, 10b-5, 10b-10, 15c1-2 and 17a-3(a)(6) thereunder; and Sections 204, 206(1), 206(2), 206(3) and 207 of the Advisers Act and Rule 204-2 thereunder. -6-