==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36829 / February 12, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8943 ------------------------ : : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS, MAKING JAMES S. SMALL : FINDINGS AND IMPOSING : 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 James S. Small ("Small"). In anticipation of the institution of these proceedings, Small has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding 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, Small by his Offer consents to the findings and the 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 Small be, and hereby are, instituted. II. On the basis of this Order, and the Offer submitted by Small, the Commission finds that:1/ A. Small is a first vice-president of Dean Witter Reynolds, Inc. ("Dean Witter"), a registered broker-dealer with its principal offices in New York, New York. Small was the branch manager of Dean Witter's Wayne, Pennsylvania office from June 1990 until May 1995. Small has been licensed with the National Association of Securities Dealers ("NASD") since 1983. B. Anthony J. Benincasa ("Benincasa") was employed by Dean Witter as a registered representative from July 1991 until January 28, 1994. Prior to July 1991, Benincasa had been employed at two other brokerage firms, and had been licensed by the NASD since 1985. C. Peter T. Jones ("Jones") was, at all times relevant to these proceedings, acting, and holding himself out, as an investment adviser, without registering with the Commission as such. In addition, Jones was, at all times relevant to these proceedings, the president, general partner and principal of Independence Asset Management ("IAM"), which purported to be a general partnership and investment club. Jones was solely responsible for the daily operations of IAM. D. From at least 1985 through November 1993, Jones, through IAM and a predecessor entity, engaged in a Ponzi scheme through which he fraudulently raised at least $9.2 million from over 400 investors. During the period of the scheme, Benincasa was employed, consecutively, at three different brokerage firms, including Dean Witter. At each of those firms, he was the sole registered representative for the IAM brokerage accounts, and the IAM accounts were Benincasa's principal accounts. Together with Jones, Benincasa developed trading strategies for the accounts. He also solicited a substantial percentage of the trades in the accounts. E. Almost from the outset, Benincasa had actual knowledge that IAM was not a two person partnership, as it purported to be, but was instead comprised of at least 100 investors. However, Benincasa concealed this information from his supervisors at each of the brokerage firms where he was employed, including Dean Witter. In addition, in order to facilitate Jones' fraud, Benincasa falsified certain information contained on brokerage account documentation. He told Jones how to open the IAM accounts and intentionally concealed the fact that the source of 1/ The findings herein are made pursuant to Small's Offer of Settlement and are not binding on any other person or entity named as a respondent in any other proceeding. ==========================================START OF PAGE 3====== funds used for trading in the accounts was money raised from numerous investors. F. In July 1991, Benincasa became employed by Dean Witter. As part of his compensation package with the firm, Benincasa received 70 percent of all commissions generated by him for the first 13 months of his employment. In addition, Dean Witter partially financed a specialized computer to obtain quotations on commodities products. Of Benincasa's accounts, IAM was the principal account that traded in commodities. G. From July 1991 through November 1993, the IAM account was the most active account in the Wayne branch office and also generated the most commission income. While the IAM account lost more than $440,000 during the period, it generated over $220,000 in gross commissions. While at Dean Witter, Benincasa earned approximately $132,000 in commission income from the IAM account. H. Section 17(a) of the Exchange Act requires registered broker-dealers to "make and keep such . . . records . . . as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title." I. From July 1991 to November 1993, Benincasa, among other things, willfully aided and abetted violations of Section 17(a) of the Exchange Act and Rule 17a-3(a)(9) promulgated thereunder in that he either recorded false information, or directed another to record false information, on various Dean Witter books and records. Benincasa falsely identified IAM as a two person partnership on new account documentation. By falsely representing IAM as a two person partnership, Benincasa and Jones were able to conceal the extent of losses in the account from the IAM investors since they were not identified in the account documentation as the true beneficial owners of the account. In furtherance of this misrepresented fact, Benincasa forged signatures for one of the purported partners, and entered false information regarding the net worth of IAM. J. From July 1991 until January 28, 1994, Small directly supervised Benincasa as branch manager of the Wayne branch office. Small devoted approximately 60 percent of his time to supervisory duties and spent the remaining portion servicing his personal clients' accounts. Small also received a percentage of the branch's profits. K. From July 1991 through November 1993, Small failed reasonably to supervise Benincasa with a view to preventing Benincasa's aiding and abetting violations set forth in paragraph II.I. above, in that he failed to respond to "red flags" alerting him to certain irregularities with the IAM accounts. For example, throughout the period of Benincasa's employment, Small ==========================================START OF PAGE 4====== received a total of 23 inter-office communications from Dean Witter's compliance department concerning the IAM account and/or Benincasa. In particular, a March 1993 inter-office memorandum specifically inquired about the nature of the IAM account and about whether the account made investments on behalf of anyone other than the two named partners. Small delegated the responsibility for gathering the information for these inquiries to Benincasa. He never personally gathered the information responsive to the inquiries or took steps to verify information contained in the account documentation. In addition, Small was deficient in implementing Dean Witter's active account procedures, which were designed to alert branch managers to potential problems with accounts and account representatives under their supervision. L. Based on the foregoing, Small failed reasonably to supervise Benincasa with a view to preventing the violations of the federal securities laws set forth in paragraph II.I. above, within the meaning of Section 15(b)(4)(E) of the Exchange Act. III. On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer. Accordingly, IT IS HEREBY ORDERED that: A. Small be, and hereby is, suspended from acting in a supervisory or proprietary capacity with any broker, dealer, investment adviser, investment company or municipal securities dealer for a period of twelve (12) months, beginning on the second Monday after the entry of this Order. B. Small pay a civil penalty in the amount of $10,000, pursuant to Section 21B of the Exchange Act, within ten (10) days after entry of this Order. This payment should be made by United States postal money order, certified check, or cashier's check; made payable to the Securities and Exchange Commission; transmitted to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and submitted under cover letter which identifies the respondent in these proceedings and the file number of these proceedings, and a copy of which cover letter and money order or check shall be simultaneously sent to Donald M. Hoerl, District Administrator, Securities and Exchange Commission, Philadelphia District Office, 601 Walnut Street, Suit 1005E., Philadelphia, PA 19106. ==========================================START OF PAGE 5====== C. Small provide to the Commission, within thirty (30) days after the end of the twelve month period described above, an affidavit that he has complied fully with the sanctions described in Sections III.A. and III.B. above. By the Commission. Jonathan G. Katz Secretary