UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39074 / September 15, 1997 INVESTMENT ADVISERS ACT of 1940 Release No. 1663 / September 15, 1997 INVESTMENT COMPANY ACT OF 1940 Release No. 22820 / September 15, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9408 : : ORDER INSTITUTING : PROCEEDINGS PURSUANT TO In the Matter of: : SECTIONS 15(b), 19(h) AND : 21C OF THE SECURITIES VILIS PASTS, BTS/BOND TIMING, : EXCHANGE ACT OF 1934, INC. (801-14895), BOND TIMING : SECTIONS 203(e) AND SECURITIES CORP. (8-26818) : 203(f) OF THE and ADONIS BERZINS : INVESTMENT ADVISERS ACT : OF 1940 AND SECTIONS 9(b) : AND 9(f) OF THE : INVESTMENT COMPANY ACT OF : 1940, MAKING FINDINGS, : IMPOSING REMEDIAL : SANCTIONS AND ISSUING : CEASE-AND-DESIST ORDERS : : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 203(f) 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 Vilis Pasts ("Pasts"); pursuant to Section 203(e) of the Advisers Act and Sections 9(b) and 9(f) of the Investment Company Act against BTS/Bond Timing, Inc. (File No. 801-14895) ("BTS" or "Registrant"), a registered investment adviser; pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Pasts and Bond Timing Securities Corp. (File No. 8-26818) ("BTSC"), a registered broker- dealer; and pursuant to Section 203(f) of the Advisers Act against Adonis Berzins ("Berzins"). ======END OF PAGE 1====== II. In anticipation of the institution of these proceedings, Pasts, BTS, BTSC and Berzins have submitted Offers of Settlement ("Offers") that 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 any of the findings contained herein except as to the jurisdiction of the Commission over them and over the subject matter of this proceeding, which are admitted, Pasts, BTS, BTSC and Berzins consent to the issuance of this Order, the entry of the findings and the imposition of the remedial sanctions and the cease-and-desist orders set forth below. Accordingly, IT IS ORDERED that proceedings pursuant to Sections 15(b), 19(h) and 21C of the Exchange Act, Sections 203(e) and 203(f) of the Advisers Act and Sections 9(b) and 9(f) of the Investment Company Act be, and hereby are, instituted. III. On the basis of this Order and the Offers of Settlement submitted by Pasts, BTS, BTSC and Berzins, the Commission makes the following findings: <(1)> A. Respondents 1. BTS, a registered investment adviser since 1979, offers a mutual fund timing service to investors. Investors are referred to BTS by registered representatives of unaffiliated broker-dealers and financial planners ("referring agents"). Mutual funds are chosen by the client and the client's broker-dealer. BTS possesses discretionary authority to allocate and reallocate investments within a family of funds. BTS charges a management fee to clients according to a set schedule, and then pays a portion of those fees to the referring agent. As of July 1996, BTS had more than 8,000 clients and over $500 million under management. 2. BTSC, a registered broker-dealer and an affiliate of BTS, sells mutual funds and variable annuities. BTSC has no full-time employees, but certain BTS personnel are also designated as BTSC officers or employees. 3. Pasts is the sole shareholder and Chairman of BTS. Since 1979, Pasts has been responsible for market research and timing decisions, the primary service that BTS offers to investors. During the relevant time period, Pasts was the president of BTSC. He is currently BTSC's Vice- President. <(1)>/ The findings herein are made pursuant to Respondents' offers of settlement, as amended by letter dated August 25, 1997, and are not binding on any other person or entity named as a respondent in this or any other proceedings. ======END OF PAGE 2====== 4. Berzins is the former President and Treasurer of BTS and currently serves as a member of the Board of Directors. Between 1990 and 1994, Berzins was responsible for the day-to-day management of BTS. B. Related Individual The individual who embezzled funds from BTS served as the senior financial officer of BTS, holding the titles of Senior Accountant and Comptroller from January 1990 through September 1994 (the "Comptroller"). From 1990 until September 1994, the Comptroller embezzled $3,917,511.59 from BTS. The Comptroller is currently imprisoned. / C. Summary Shortly after discovering the Comptroller's embezzlement, BTS and Pasts violated Section 34(b) of the Investment Company Act by making material misstatements and omissions about BTS' compliance procedures in an exemptive application filed with the Commission. The Comptroller accomplished his embezzlement by writing checks primarily to two sham entities on behalf of inactive registered representatives with whom BTS previously had transacted business and altering BTS' computerized records to make it appear that such registered representatives were employees of one of the two sham entities. To conceal his scheme, the Comptroller falsified numerous BTS books and records, thereby aiding and abetting violations by BTS of the record-keeping requirements of the Advisers Act, Section 204 and Rules 204-2(a)(1), 204-2(a)(2), 204-2(a)(4), 204-2(a)(5) and 204-2(a)(6) thereunder. BTS and Berzins failed reasonably to supervise the Comptroller within the meaning of Sections 203(e) and 203(f) of the Advisers Act. In addition, BTS' broker-dealer affiliate, BTSC, violated Sections 17(a)(1) and 17(f)(2) of the Exchange Act and Rules 17a-5(d) and 17f-2 thereunder by filing required annual financial statements with the Commission which contained the signature of a nonexistent certified public accountant on accompanying audit reports, and by failing to have the Comptroller fingerprinted. Pasts was a cause of BTSC's violations. D. BTS and Pasts Violated Section 34(b) of the Investment Company Act On September 26, 1994, BTS and Pasts filed an application, pursuant to Section 9(c) of the Investment Company Act, for an exemption from the provisions of Section 9(a) of the Investment Company Act (the "Application"). BTS and Pasts wished to organize and BTS wished to serve as investment adviser to one or more registered open-end investment companies. The Application stated that, while they did not believe that an existing state court order <(1)> was an injunction causing <(1)>/ The Order, Commonwealth of Pennsylvania v. Bond Timing Services, Inc. and Pasts, No. 2345 C.D. 1986 (Pa. Commw. Ct., February 23, 1987), found that, between 1981 and 1983, Pasts and BTS conducted business with over 50 clients in (continued...) ======END OF PAGE 3====== disqualification under Section 9(a), they were seeking relief under Section 9(c) to resolve all doubt as to whether or not they were disqualified. <(1)> The Application further stated that "compliance problems" that had resulted in a 1984 administrative proceeding by the Commission against BTS and Pasts for violations of antifraud, recordkeeping, and reporting provisions of the Advisers Act "have been ameliorated, and [BTS] has taken permanent remedial measures which have caused [BTS] to significantly improve its compliance with the Advisers Act." <(1)> The Application <(1)>(...continued) Pennsylvania at a time when BTS was not registered with the state authorities. Pasts and BTS consented to an order enjoining them from doing business as an investment adviser in Pennsylvania for fourteen months, requiring disgorgement of $52,285.50, and requiring future compliance with the Pennsylvania Securities Act. <(1)>/ In relevant part, Section 9(a) prohibits any person who has been enjoined by order, judgment or court decree from engaging in any practice or conduct in connection with its activities as an investment adviser from acting as an employee, officer, director, member of an advisory board or depositor of any registered investment company or principal underwriter of certain registered investment companies. Section 9(c) provides a procedure for application for relief from Section 9(a). Under Section 9(c) of the Investment Company Act, the Commission may grant an application for relief from Section 9(a) of the Investment Company Act if it is established that the prohibitions of Section 9(a), as applied to the applicant, are "unduly or disproportionately severe" or that "the conduct of such person has been such as not to make it against the public interest or protection of investors to grant such application." <(1)>/ The 1984 Order cited BTS and Pasts for failure to make and keep certain books and records required under the Advisers Act. Specifically BTS: (i) failed to disclose material facts and failed to fulfill contractual obligations to clients in violation of Sections 206(1) and 206(2); (ii) used advertisements that violated Rule 206(4)-1; (iii) failed to follow the requirements of Rule 206(4)-2 while maintaining custody and possession of client assets; (iv) failed to make and keep accurate and current general ledgers, checkbooks and canceled checks, and failed to maintain current or accurate records of clients' securities positions and certain books and records required by Rule 204-2; (v) made untrue statements of material facts in BTS' Form ADV in violation of Section 207; (vi) failed to file appropriate amendments to BTS' Form ADV and to file a balance sheet and a Form ADV-S on a timely basis in (continued...) ======END OF PAGE 4====== expressly stated that BTS had "greatly expanded its compliance and accounting staff," installed a computer, and eliminated certain account management practices to address the violations found by the Commission. Pasts had learned of the Comptroller's embezzlement on September 19, 1994, one week prior to the filing of the Application and three days prior to signing the Application. By the time the Application was filed, Pasts knew that the Comptroller's embezzlement totalled in excess of $829,000, and the total would be significantly larger. Pasts also knew that the embezzlement had been accomplished through the manipulation of BTS' books and records, calling into question the adequacy of BTS' revised compliance procedures. Despite this knowledge, the Application falsely stated that the problems identified by the Commission had been ameliorated, and that BTS had taken permanent remedial measures which caused the Registrant to significantly improve its compliance with the Advisers Act. In light of the embezzlement, the statements in the Application pertaining to BTS' compliance were materially misleading. Moreover, the Application did not evaluate the adequacy of BTS' procedures in light of the fact that an embezzlement had occurred. <(1)> <(1)>(...continued) violation of Rule 204-1; and (vii) failed to furnish or offer to furnish Part II of the BTS Form ADV or a brochure equivalent to clients and prospective clients as required by Rule 204-3. As a result of that action, BTS was required to comply with its undertakings to adopt, implement and maintain procedures designed to prevent a recurrence of the violations cited in the order. Pasts was suspended from acting in a supervisory capacity for 45 days and Pasts and BTS were prohibited from soliciting new accounts for 30 days. Bond Timing Services, Inc. and Vilis Pasts, Advisers Act Rel. No. 920 (July 23, 1984), 30 SEC Docket 1543. <(1)>/ BTS' supervisory procedures were not effective in detecting the Comptroller's scheme. Rather, the scheme was discovered when an employee who had been assigned to assist with routine bookkeeping functions discovered that checks she had previously observed being mailed were missing from the bank statements. She checked BTS' records and learned that BTS did not conduct business with the payees. On or about September 19, 1994, the bookkeeper brought the matter to the attention of Berzins. On September 20, Berzins informed Pasts that the Comptroller had apparently embezzled $50,000 from BTS, and indicated the total would likely be higher. BTS contacted the FBI. By the close of business on September 23, 1994, BTS had identified a total of $829,629.20 that the Comptroller had embezzled between January and September 1994. As of September 23, 1994, BTS employees had not calculated amounts embezzled prior to 1994. Thus, Pasts understood that the Comptroller had (continued...) ======END OF PAGE 5====== Section 34(b) of the Investment Company Act makes it "unlawful for any person to make any untrue statement of a material fact in any registration statement, application, report, account, record, or other document filed or transmitted pursuant to [the Act] . . . . It shall be unlawful for any person so filing, transmitting, or keeping any such document to omit to state therein any fact necessary in order to prevent the statements made therein, in the light of the circumstances under which they were made, from being materially misleading." See Concourse Capital Asset Management, Inc., Investment Company Act Rel. No. 20698 (November 15, 1994), 1994 SEC LEXIS 3582 (Jeffrey Alexopulos, president and director of fund and co-owner of fund's adviser, violated Section 34(b) by filing false and misleading reports). See also Melvin L. Hirsch, Investment Company Act Rel. No. 20560 (September 19, 1994), 57 SEC Docket 1822 (president and chairman of board of an investment company directly violated Section 34(b) by causing the investment company to file reports concerning investment company funds). Pasts directed the preparation of the filing, was responsible for its content and signed the Application on behalf of BTS and on his own behalf. Although Pasts knew, at the time the Application was filed, that BTS' senior financial officer had embezzled more than $800,000, and that the total would likely be higher, BTS and Pasts misrepresented that BTS had cured BTS' compliance problems. These untrue statements and omissions were material. The applicants sought exemptive relief based primarily on their representations regarding the current adequacy of BTS' recordkeeping and compliance procedures. Pasts was aware of a major failure of compliance with the Commission's recordkeeping rules. In addition, BTS and Pasts knew of serious inadequacies in BTS' procedures to detect and prevent fraud by BTS employees. Nevertheless, BTS and Pasts falsely represented in the Application that BTS had overcome the problems cited by the Commission in a previous order. These statements were false, in light of the Comptroller's embezzlement. BTS and Pasts also failed to discuss the continued adequacy of BTS' compliance procedures and supervision in light of the embezzlement. Accordingly, BTS and Pasts failed to disclose information that BTS had inadequate controls over its primary financial records. This information was material in light of the fact that the Commission had previously sanctioned BTS for recordkeeping and reporting violations. The omitted information was known to BTS and Pasts at the time the filing was made. <(1)> Accordingly, BTS and Pasts willfully violated Section 34(b) of the Investment Company Act. E. BTS and Berzins Failed Reasonably to Supervise the Comptroller 1. The Comptroller Aided and Abetted Violations <(1)>(...continued) probably embezzled additional monies. The final total was identified in October 1994. <(1)>/ In addition, Pasts subsequently learned that the total amount embezzled exceeded $3.9 million. No client funds were affected. ======END OF PAGE 6====== of Section 204 of the Advisers Act and Rules 204-2(a)(1), 204-2(a)(2), 204-2(a)(4), 204-2(a)(5) and 204-2(a)(6) Thereunder In 1990, shortly after he became employed at BTS, the Comptroller created two sham entities, Equity Financial Management ("EFM") and Financial Solutions ("FS"). These companies had no business operations, but were merely checking accounts controlled by the Comptroller. Commencing in 1990, and continuing until the embezzlement was discovered in September 1994, the Comptroller caused BTS to issue more than 700 checks, totalling $3,917,511.59, to these companies, which he then misappropriated for his personal use. To conceal his scheme, the Comptroller repeatedly falsified books and records at BTS. BTS paid out approximately 1000 checks per month, the majority of which represented payments to referring agents. The BTS computer system was designed to accommodate BTS' practice of regularly adding referring agents and deleting inactive agents from the system. Accordingly, the Comptroller could, and did, reactivate payments to referring agents who had become inactive without triggering any review by others at the firm. The Comptroller then opened bank accounts in the names of EFM and FS and assigned names of inactive referring agents who had previously done business with BTS to these firms. On a weekly basis, the Comptroller authorized payments of "commissions" to these individuals. In addition, the Comptroller prepared manual checks payable to EFM and FS, which he provided to Berzins for signature. Berzins knew that BTS' procedures permitted manual checks to be prepared only where there was an urgent need for immediate payment. From January 1993 to July 1994, the Comptroller wrote 62 manual checks to either EFM, FS or other entities totalling approximately $487,710.09. Berzins, as the Comptroller's supervisor, signed the checks. On the occasions when the Comptroller was questioned, the Comptroller would explain that the checks were necessary to resolve discrepancies that had arisen between BTS' records and the records of the agents with whom BTS conducted business, and those explanations were accepted without further inquiry. Thus, BTS records falsely reflected the payments of legitimate fees or commissions to EFM and FS when, in fact, these monies were misappropriated by the Comptroller. The Comptroller was responsible for handling all bank reconciliations and preparing BTS' financial statements. While performing reconciliations, the Comptroller removed and destroyed checks payable to EFM and FS in order to conceal evidence of his misappropriations. He would also adjust cash in the general ledger by making false adjusting journal entries. The Comptroller was able to conceal his conduct because no one else at BTS reviewed bank statements, checks or reconciliations, or evaluated the adjusting entries. / Section 204 of the Advisers Act requires registered investment advisers to make and keep such records and reports as the Commission may, by rule, prescribe. Rule 204-2(a), promulgated thereunder, contains specific subsections requiring registered investment advisers to make and ======END OF PAGE 7====== keep true, accurate and current books and records. Rule 204-2(a)(1) requires an accurate journal or journals forming the basis of entries in any ledger. Rule 204-2(a)(2) requires accurate general and auxiliary ledgers reflecting asset, liability, reserve capital, income and expense accounts. Rule 204-2(a)(4) requires accurate and complete checkbooks, bank statements, cancelled checks and cash reconciliations. Rule 204-2(a)(5) requires accurate and complete bills or statements, paid or unpaid. Rule 204-2(a)(6) requires accurate financial statements. These records, which were maintained by the Comptroller for BTS, were false. For example, BTS' journals and other records of original entry forming the basis for entries in BTS' general ledger falsely reflected payments of commissions to a number of individuals at EFM and FS which were in fact monies misappropriated by the Comptroller. BTS' general and auxiliary ledgers inaccurately reflected commission expense amounts. BTS' check books falsely reflected payments to EFM and FS registered representatives, or fee payments, which were in fact monies misappropriated by the Comptroller, and cancelled checks reflecting any monies misappropriated by the Comptroller were removed and destroyed. BTS' bills and statements were incomplete in order to conceal payments to EFM and FS. BTS' trial balances were also false because of the monies misappropriated by the Comptroller. The Comptroller substantially assisted the violations and acted with a general awareness of wrongdoing. Accordingly, the Comptroller willfully aided and abetted violations of Section 204 of the Advisers Act and Rules 204-2(a)(1), 204-2(a)(2), 204-2(a)(4), 204-2(a)(5) and 204-2(a)(6) thereunder. 2. Standards of Supervision Under Sections 203(e) and 203(f) of the Advisers Act, the Commission may seek sanctions where an investment adviser or an associated person has failed reasonably to supervise, with a view to preventing violations of the federal securities laws and rules thereunder, another person subject to the investment adviser's or associated person's supervision who commits such violations. Sections 15(b)(4) and 15(b)(6) of the Exchange Act provide similar authority with respect to registered broker-dealers and associated persons of such broker-dealers. While under BTS' and Berzins' supervision between 1991 and 1994, the Comptroller aided and abetted BTS's violations of Section 204 of the Advisers Act and Rules 204-2(a)(1), 204-2(a)(2), 204-2(a)(4), 204-2(a)(5) and 204-2(a)(6) thereunder. During this time, BTS did not have in place supervisory procedures adequate to detect or prevent the Comptroller's violations. See Van Kampen American Capital Asset Management, Advisers Act Rel. No. 1525 (September 29, 1995), 60 SEC Docket 1284; William Buecking, Advisers Act Rel. No. 1494 (June 6, 1995), 59 SEC Docket 1470; Gary E. Bryant, Exchange Act Rel. No. 32357 (May 24, 1993), 54 SEC Docket 431, 442 (firm's structure must include "specific controls or supervisory procedures designed to deter or detect misconduct"). The Commission has repeatedly emphasized that the duty to supervise is ======END OF PAGE 8====== a critical component of the federal regulatory scheme. See John H. Gutfreund, Exchange Act Rel. No. 31554 (Dec. 3, 1992), 52 SEC Docket 4370, 4386. As noted in Universal Heritage Inv. Corp., 47 S.E.C. 839, 845 (1982): [t]he president of a corporate broker-dealer is responsible for compliance with all of the requirements imposed on his [or her] firm unless and until he [or she] reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person s performance is deficient. In addition, management bears the responsibility to ensure that procedures reasonably designed to prevent and detect wrongdoing are adopted, and to take appropriate steps if it receives indications that such procedures are not working. Gary E. Bryant, 54 SEC Docket at 441-42. Supervisors must not only respond vigorously when wrongdoing is brought to their attention, but must respond vigorously even to indications of possible wrongdoing. See Kemper Fin. Serv., Inc., Advisers Act Rel. No. 1494 (June 6, 1995), 1995 SEC Lexis 1311, at *18. See also Gutfreund, 52 SEC Docket at 4386-87 (federal securities laws require a vigorous response even to indications of wrongdoing); Wedbush Sec., 48 S.E.C. 963, 967 (1988) (especially imperative that those in authority exercise particular vigilance when indications of irregularity reach their attention). Red flags and suggestions of irregularities demand inquiry as well as adequate follow-up and review. When indications of impropriety reach the attention of those in authority, they must act decisively to detect and prevent violations of the federal securities laws. Kemper Fin. Serv., Inc., 1995 SEC Lexis 1311 at *18-19 (quoting Edwin Kantor, Exchange Act Rel. No. 32341 (May 20, 1993), 54 SEC Docket 293, 301). See also Michael H. Hume, Exchange Act Rel. No. 35608 (Apr. 17, 1995), 1995 SEC Lexis 983, at *11 (a failure to supervise can arise where a supervisor was aware only of red flags or suggestions of irregularity); Frederick H. Joseph, Exchange Act Rel. No. 32340 (May 20, 1993), 54 SEC Docket 283, 291. Accordingly, a registrant and its managers cannot fail to enforce procedures. 3. BTS Failed Reasonably to Supervise the Comptroller BTS failed to segregate control of the checkbook from control of the general ledger. BTS also had inadequate procedures for randomly verifying reactivated referring agents and for randomly confirming payments to referring agents. BTS did not verify manual check payment amounts. The Comptroller, who prepared the checks, was also responsible for handling checkbook reconciliations. BTS also did not review suspense account entries or cash reconciliations, except at the beginning and ending of each year. BTS did not have procedures in place that would have required supervisory personnel at BTS to perform these tasks. Therefore, BTS failed reasonably to supervise the Comptroller. 4. Berzins Failed Reasonably ======END OF PAGE 9====== to Supervise the Comptroller Berzins, as President of BTS, was responsible for ensuring that the firm's financial and operational procedures were adequate to detect and prevent violations by the firm and its employees. Berzins, the Comptroller's immediate supervisor, relied entirely on the Comptroller to prepare checks and reconcile account statements without any verification or review. Berzins also knew that the Comptroller had access to the system for activating new relationships with agents, and for reactivating inactive accounts. Because BTS had loosely-defined procedures to review checkbooks, reconciliations, new accounts and reactivated accounts, suspense accounts, error accounts or correcting entries, or the commission payment ratio, and because Berzins failed to verify manual check payment amounts, the Comptroller was able to effectuate his scheme. Berzins also knew that company policy required that commission checks be written electronically, and manual checks be issued only where there was an urgent need for payment. When presented with "red flags" in the form of repeated requests by the Comptroller to issue manual checks, including checks to EFM and FS, Berzins, who signed most of the manual checks, questioned only some of the payments. Therefore, Berzins failed reasonably to supervise the Comptroller. F. BTSC Failed to File Audited Statements and to Notify Commission of Change in Auditor in Violation of Exchange Act Section 17(a)(1) and Rule 17a-5 Thereunder As a registered broker-dealer, BTSC is required to file annually with the Commission and the NASD a report audited by an independent public accountant on Form X-17A-5. In 1991, BTSC's auditor died. The Comptroller approached Pasts and offered to obtain a new auditor. For the years 1991, 1992 and 1993, the Comptroller completed the Forms X-17A-5 for BTSC and forged the signature of a fictitious individual as BTSC's auditor. Pasts signed the forms on behalf of BTSC based solely on the Comptroller's oral representation that an audit had been conducted. Pasts never met or asked to meet with the purported auditor, and never saw or asked for an audit engagement letter, correspondence or a bill. BTSC paid no fees for these audits. BTSC failed to notify the Commission that it had changed auditors in 1991, and again failed to notify the Commission that it had changed auditors to another accounting firm which handled BTSC's annual audit for the 1994 period. Accordingly, BTSC willfully violated Section 17(a) of the Exchange Act and Rule 17a-5 thereunder. G. BTSC Violated Section 17(f)(2) of the Exchange Act and Rule 17f-2 Thereunder From 1991 until September 1994, the Comptroller was required to be fingerprinted as an associated person of BTSC because he prepared financial statements, Commission filings and FOCUS Reports, oversaw the maintenance of BTSC's books and records and supervised BTSC's bookkeeper. During this period, the Comptroller had complete control over and access to BTSC's books and records. The Comptroller, however, was never fingerprinted. Accordingly, BTSC willfully violated Section 17(f)(2) of the Exchange Act ======END OF PAGE 10====== and Rule 17f-2 thereunder. Pasts, as President of BTSC, failed to ensure that the Comptroller was fingerprinted in accordance with Rule 17f-2. Moreover, when questioned by National Association of Securities Dealers, Inc. ("NASD") examiners regarding BTSC's failure to fingerprint the Comptroller, Pasts, in a letter dated January 8, 1992, represented to the NASD that the Comptroller had been fingerprinted. Pasts, however, never adequately verified whether the Comptroller had, in fact, been fingerprinted. H. Pasts Was a Cause of BTSC's Violations of Exchange Act Sections 17(a)(1) and 17(f)(2) and Rules 17a-5 and 17f-2 Thereunder Section 21C of the Exchange Act authorizes the Commission to issue orders requiring persons to cease and desist from committing or causing violations of the Act where those persons knew or should have known that their acts or omissions would contribute to such violations. Pasts knew or should have known that his acts or omissions described in Paragraphs III.F and G., above, would contribute to BTSC's violations of Exchange Act Sections 17(a)(1) and 17(f)(2) and Rules 17a-5 and 17f-2 thereunder. Accordingly, Pasts caused violations of Section 17(a)(1) and 17(f)(2) of the Exchange Act and Rules 17a-5(d) and 17f-2 thereunder. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers of Settlement submitted by Pasts, BTS, BTSC and Berzins and impose the sanctions agreed to in the Offers. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 9(f) of the Investment Company Act, that BTS and Pasts cease and desist from committing or causing any violations and any future violations of Sections 34(b) of the Investment Company Act, and, pursuant to Section 21C of the Exchange Act, that BTSC cease and desist from committing or causing and Pasts cease and desist from causing any violations and any future violations of Sections 17(a)(1) and 17(f)(2) of the Exchange Act and Rules 17a-5 and 17f- 2 thereunder; IT IS FURTHER ORDERED that BTS and BTSC be, and hereby are, censured; IT IS FURTHER ORDERED that Berzins be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company for a period of one month, effective on the second Monday following the issuance of this Order; IT IS FURTHER ORDERED that Pasts be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company for a period of three months, effective on the tenth business day following the final day of Berzins' one-month suspension; IT IS FURTHER ORDERED that Berzins be, and hereby is, suspended from ======END OF PAGE 11====== acting in any supervisory or proprietary capacity with any broker, dealer, municipal securities dealer, investment adviser or investment company for a period of six months immediately following the period of his suspension from association; IT IS FURTHER ORDERED that, within ten (10) days of the issuance of this Order, pursuant to Section 21B of the Exchange Act, Section 203(i) of the Advisers Act and Section 9(d) of the Investment Company Act, BTS shall pay a civil money penalty in the amount of $100,000, Pasts shall pay a civil money penalty in the amount of $100,000, Berzins shall pay a civil money penalty in the amount of $25,000 and BTSC shall pay a civil money penalty in the amount of $30,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) sent by certified mail to the Office of the Comptroller, U.S. Securities and Exchange Commission, 450 5th Street, N.W., Mail Stop 0-3, Washington, D.C. 20549; and (D) submitted under cover letter which identifies Vilis Pasts, BTS/Bond Timing, Inc., Bond Timing Securities Corp., and Adonis Berzins as the Respondents in these proceedings, the file number of these proceedings and the Commission's case number, a copy of which cover letter and money order or check shall be sent to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, Massachusetts, 02108; and IT IS FURTHER ORDERED that BTS and BTSC shall comply with the following undertakings contained in their offers of settlement: Independent Consultant A. BTS and BTSC shall retain, at their expense, within 30 days of the issuance of this Order, an independent consultant, not unacceptable to the Commission staff, to review BTS' and BTSC's compliance policies and procedures and a system for applying such procedures, which would reasonably be expected to detect, insofar as practicable, any such violation by a person, related to: (1) the payment of commissions to referring agents; (2) the appropriate division of responsibilities between the preparation of checks and the reconciliation of checkbook balances; (3) the supervision of employees responsible for the preparation of, and with access to, BTS' and BTSC's books and records; (4) the issuance and maintenance of the manual check register; (5) employee access to computerized databases relating to BTS' and BTSC's books and records; (6) the retention of auditors and review of audit findings; and ======END OF PAGE 12====== (7) where appropriate, the procedures for fingerprinting employees; B. BTS and BTSC shall provide to the Commission staff, within 30 days of the issuance of the Order, with a copy of an engagement letter detailing the consultant's responsibilities; C. BTS and BTSC shall cooperate fully with the consultant, including obtaining the cooperation of BTS' and BTSC's employees or other persons under its control; D. The consultant shall report to the Commission staff on his activities as the staff shall request; E. The consultant may engage such assistance, clerical, legal or expert, as necessary and at reasonable cost, to carry out his activities and the cost, if any, of such assistance shall be borne exclusively by BTS and BTSC; F. BTS and BTSC shall require the consultant, at BTS' and BTSC's expense, to prepare a report making recommendations as to BTS' and BTSC's policies and procedures and system for applying such procedures, as described in paragraph A. above; G. BTS and BTSC shall require the consultant to deliver the report to BTS and BTSC and to the Commission staff within 90 days of the issuance of this Order; H. BTS and BTSC shall adopt all recommendations by the consultant in the report within six months after its issuance; provided, however, that as to any of the consultant's recommendations that BTS or BTSC determine is unduly burdensome or impractical, BTS or BTSC may suggest an alternative procedure designed to achieve the same objective, submitted in writing to the consultant and the Commission staff. The consultant shall reasonably evaluate BTS' or BTSC's alternative procedure. BTS and BTSC shall abide by the consultant's determination with regard thereto and adopt such recommendations; and I. BTS and BTSC shall, within nine months from the issuance of this Order, each provide an affidavit via certified mail to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, Massachusetts 02108, that it has complied with the above undertakings. Such affidavit shall contain a statement describing the procedures adopted and implemented in compliance with paragraph H. above. Other Undertakings J. BTS shall appoint a director of compliance, shall define the duties of such officer, and shall ensure that such officer has ======END OF PAGE 13====== access to BTS' board of directors, and is subject to the direct supervision of, and reports to, BTS' president. This officer shall attend at least one continuing professional education course in each of the next three years; and K. BTS and BTSC shall provide training to relevant employees designed reasonably to effect understanding of, and compliance with, the newly implemented policies and procedures. IT IS FURTHER ORDERED that Pasts shall comply with the undertaking, contained in his offer of settlement, to attend at least one continuing professional education course in each of the next three years; IT IS FURTHER ORDERED that Berzins shall comply with the undertaking, contained in his offer of settlement, to attend at least one continuing professional education course in each of the next three years; IT IS FURTHER ORDERED that, within thirty (30) days after the expiration of the suspensions described above, Respondents Pasts and Berzins shall provide an affidavit via certified mail to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, Massachusetts 02108, setting forth with particularity the details of their compliance with the suspensions as set forth above. Respondent Berzins cannot, in any event, again act in a supervisory or proprietary capacity until he delivers such affidavit. By the Commission. Jonathan G. Katz Secretary // On December 20, 1994, the Comptroller pled guilty to a 40-count indictment relating to the conduct described herein. On March 14, 1995, the Comptroller was sentenced to 51 months in federal prison, three years of supervised release thereafter, and ordered to pay $3,917,511.59 in restitution to BTS. // BTS retained outside auditors to audit the firm's books and records. These audits did not relieve BTS or its officers of responsibility for compliance with applicable regulations. The audits did not uncover the Comptroller's scheme. ======END OF PAGE 14======