UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39168 / September 30, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9469 : : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS, MAKING PENN CAPITAL FINANCIAL : FINDINGS AND IMPOSING SERVICES, INC. : REMEDIAL SANCTIONS : : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that administrative proceedings be instituted pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Penn Capital Financial Services, Inc. ("Penn Capital Financial"), a broker-dealer registered with the Commission. In anticipation of the institution of these proceedings, Penn Capital Financial has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding 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 for those set forth in paragraph II.A. below, which are admitted, Penn Capital Financial by its Offer consents to the findings and imposition of the sanctions contained in this Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions ("Order"). Accordingly, IT IS ORDERED that proceedings against Penn Capital Financial be, and hereby are, instituted. II. On the basis of this Order and the Offer submitted by Penn Capital Financial, the Commission finds that:<(1)> A. Penn Capital Financial has been incorporated in Pennsylvania since February 1991. At all times relevant to this proceeding, Penn Capital Financial, headquartered in Penn Hills, Pennsylvania, has been registered with the Commission as a broker-dealer. B. Penn Capital Management, Inc. ("Penn Capital Management") was incorporated in Pennsylvania in February 1991. Penn Capital Management was the parent company of Penn Capital Financial until April 1994, when Philip F. Roy Jr. ("Roy Jr.") became Penn Capital Financial's sole owner. Roy Jr, along with others, was a founder of Penn Capital Management. C. From April 1994, when he purchased Penn Capital Financial from Penn Capital Management, until his death on April 24, 1995, Roy Jr. owned Penn Capital Financial and controlled its operations. D. In or about February 1991, Roy Jr. and others initiated a purported offering of Penn Capital Management securities. Roy Jr. and other individuals solicited investors for the offering through Penn Capital Financial, where they were employed as registered representatives. In order to induce individuals to invest, Roy Jr. and others promised that funds invested would be used to purchase interests in mutual funds or in certificates of deposit, and that these investments would earn a guaranteed annual rate of return of nine percent, paid quarterly. E. In many instances, the name of Penn Capital Management was never mentioned to the investors. Some investors subsequently received a confirmation statement from Penn Capital Financial which referred to the investment as "participating preferred stock, Class A." Investors subsequently received payments, which purported to represent a return of interest and principal on their investment, but which in reality were often paid from the funds of other investors. F. From February 1991 through June 1994, Roy Jr. and others raised at least $1,032,000 from 36 public investors in the Penn Capital Management offering. Investor proceeds were not invested in mutual funds, certificates of deposit or preferred stock, as promised, but were commingled in a Penn Capital Management bank account which Roy Jr. and others controlled. Investor funds were used to pay participants in the fraud, to pay other investors, and by Penn Capital Management to conduct its business. G. In September 1994, Roy Jr. initiated another fraudulent scheme <(1)> The findings herein are made pursuant to Penn Capital Financial's Offer and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== involving a purported offering of securities in Roy Plaza, a small strip shopping center in Penn Hills, Pennsylvania ("Roy Plaza offering"). The alleged securities were shares in Roy Plaza preferred stock, which did not exist. Roy Plaza, an unincorporated entity, was owned by a trust established by Roy Jr.'s parents in 1991 for the benefit of their adult children, including Roy Jr. In September 1994, Roy Jr. was the sole beneficiary of the trust. Both Penn Capital Management and Penn Capital Financial conducted business at, and were tenants of, Roy Plaza. H. Roy Jr. initiated the Roy Plaza offering partially to raise funds to repay investors in the earlier offering, and also to provide funds to be used by Penn Capital Management and Penn Capital Financial, as well as himself. I. Christopher E. Beimel ("Beimel") was Roy Jr.'s principal assistant, and a registered representative associated with Penn Capital Financial. Beimel and other registered representatives of Penn Capital Financial were the principal salespersons of the Roy Plaza offering. In order to induce investors to purchase the purported securities, these individuals made numerous false and misleading statements about the nature of, and the degree of risk inherent in, the investments, as well as the intended use of proceeds. J. The salespersons told some investors that they were investing in collateralized mortgage obligations ("CMOs"), and that the purported CMOs were guaranteed by a bank or secured by real estate. Other investors were told that funds would be invested in preferred stock, but were not told that Roy Plaza was the issuer. Some investors were told that their money would be invested in a money market fund. In many instances, the name Roy Plaza was not mentioned to the investors, who believed they were purchasing other securities. K. In both oral and written communications the investments were represented, alternatively, as certificates of deposit, mutual fund shares, preferred stock, CMOs and money market fund shares. In fact, these representations were entirely false. Salespersons also misrepresented the degree of risk inherent in the investments. Specifically, they told investors that the investments would earn a guaranteed annual rate of return of nine percent, which would be paid quarterly. ======END OF PAGE 3====== L. Many investors in the Roy Plaza offering subsequently received periodic payments, which purported to represent the guaranteed interest on their investments. Some investors also received other payments in the form of so-called bonuses or premiums. Investors were thus led to believe that the securities had been purchased and were generating a return. As a result, some investors made additional investments. M. The Roy Plaza offering document, supposedly given to each investor, but which often was not, described Roy Plaza, stated that its assets were pledged to secure payment of the obligation, and outlined the supposed use of proceeds by Roy Plaza. N. Contrary to the representations made to investors, the Roy Plaza investor proceeds were not used to purchase CMOs, preferred stock or other securities as represented. Instead, nearly all investor funds were commingled in a new account, the Roy Plaza Reserve Account, opened in September 1994, and used to pay the participants in the scheme, earlier Roy Plaza investors, investors in other offerings, or Penn Capital Management and Penn Capital Financial. Virtually none of the money raised in the Roy Plaza offering was actually used to fund the operations of Roy Plaza, as outlined in the offering document. The account was controlled by Roy Jr., Beimel and another individual. O. Between September 1994 and October 2, 1995, approximately 70 individuals invested $2,893,496 in Roy Plaza, and only $484,744 was repaid to them. On October 4, 1995, when the Roy Plaza Reserve Account was frozen pursuant to an emergency civil action brought by the Commission, it had a balance of only $5,300. Roy, Jr. received $684,542 from the account. Beimel received over $97,000, and other salespersons smaller amounts, from the account. In addition, $661,183 was directly paid to investors in earlier offerings directed by Roy Jr., including the Penn Capital Management offering. Penn Capital Financial received $105,400 from the Roy Plaza Reserve Account, and Penn Capital Management received $350,000. P. Based on the conduct described above, Penn Capital Financial willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(c)(1) of the Exchange Act, and Rules 10b-5 and 15c1-2 thereunder, in connection with the offer, purchase and sale of securities, in that it, directly and indirectly, by use of the mails and the means or instruments of transportation or communication in interstate commerce, or the means and instrumentalities of interstate commerce: employed devices, schemes or artifices to defraud; obtained money and property by means of, and made, untrue statements of material fact 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; or engaged in acts, transactions, practices or courses of business which operated as a fraud or deceit upon offerees, purchasers, and sellers of securities. Q. From at least September 1994 to October 1995, Penn Capital Financial willfully violated Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder. Section 17(a) of the Exchange Act requires ======END OF PAGE 4====== every registered broker-dealer to make and keep current such records as the Commission requires and furnish copies of the same to members of the Commission staff. Pursuant to Rule 17a-3, among the books and records that a broker-dealer must maintain are records evidencing the purchase and sale of securities. Further, Rule 17a-4 mandates that the required books and records be kept in "an easily accessible place" for various specified periods. R. Penn Capital Financial maintained a separate, undisclosed set of books and records reflecting the purchase and sale of interests in Roy Plaza, and failed to furnish these books and records to regulatory examiners, including Commission examiners. In addition, the undisclosed books and records did not reflect all transactions with regard to the Roy Plaza offering. S. On November 15, 1996, a Final Judgment and Order was entered against Penn Capital Financial by the United States District Court for the Western District of Pennsylvania, in Securities and Exchange Commission v. Penn Capital Financial Services, Inc., et al., Civil Action No. 95-1571. The Final Judgment and Order, inter alia, enjoined Penn Capital Financial from future violations of Section 17(a) of the Securities Act, Sections 10(b), 15(c)(1) and 17(a) of the Exchange Act, and Rules 10b-5, 15c1-2, 17a-3 and 17a-4 thereunder. In the civil action, the Commission alleged facts similar to those set forth herein. Penn Capital Financial consented to the entry of the Final Judgment and Order, without admitting or denying the allegations in the Commission's Complaint. ======END OF PAGE 5====== III. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer. ACCORDINGLY, IT IS ORDERED that the registration of Penn Capital Financial Services, Inc. as a broker-dealer is hereby revoked. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 6======