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UNITED STATES OF AMERICA
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In the Matter of Robert S. Colman, Respondent. |
: : : : : : : : : : |
ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940 AS TO ROBERT S. COLMAN |
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against Robert S. Colman ("Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which 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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds that:
1. The Commission has adopted rules proscribing investments that are "joint arrangements" between a registered investment company and persons affiliated with them, including their directors, without prior exemptive approval from the Commission. From 1998 through June 2000, Respondent invested in nine private placements at the same time as the Funds, which constituted joint arrangements, but without first seeking exemptive relief from the Commission.
2. Colman was a member of the board of directors of the Van Wagoner Funds, Inc., an investment company registered with the Commission, from approximately January 1, 1996 through July 7, 2000, when he resigned from the board of directors. Colman, 62, is a resident of Marin County, California. Before, during and after his service as a director of the Van Wagoner Funds, Colman was an active investor in private placements of equity securities.
3. Van Wagoner Funds, Inc. ("the Funds"), incorporated in Maryland, is a diversified investment company, registered with the Commission since January 1, 1996. From January 1, 1998 through at least December 31, 2002, the Funds consisted of a series of five open-end, publicly sold funds, including the Emerging Growth Fund, the Micro-Cap Growth Fund, the Mid-Cap Growth Fund, the Post-Venture Fund and the Technology Fund. At their peak in March 2000, the five Funds' combined net assets exceeded $3 billion. In 2003, the Mid-Cap, Post Venture and Technology Funds were liquidated, and the Micro-Cap Growth Fund's name was changed to the Small-Cap Growth Fund. The Funds are managed by Van Wagoner Capital Management, Inc., ("VWCM" or "the Adviser"), an investment adviser registered with the Commission since 1995, and located in San Francisco, California. Between 1998 and July 2000, there were three members of the board of directors of the Funds: interested director Garrett Van Wagoner and the two disinterested directors, including Respondent Colman.
4. Garrett Van Wagoner ("Van Wagoner"), 48, has been the president, an interested director, and the primary portfolio manager of the Funds since their formation. He has been the president and owner of VWCM from its inception. Van Wagoner has also been the compliance officer of the Funds and of the Adviser.
5. Between June 1998 and June 2000, Respondent invested in nine private placements of convertible, preferred securities offered by five private companies. The Funds also invested in the same securities offered by the same companies in the same rounds of private financing. Of these nine private placements, four represented follow-on investments in private companies in which Respondent was already an existing investor. In each transaction, the private company issued the securities to raise money for its business. Although Respondent independently identified the private equity investment opportunities in question, and performed independent due diligence in connection with his investment decision, in each such financing, both Respondent and Van Wagoner were aware that the other was making, or had made, an investment in the same round of financing.
6. The private placements were unregistered, limited offerings, averaging fewer than 20 separate investors. The transactions typically were not documented by offering circulars or prospectuses, nor were investment banks necessarily involved in representing the companies or the investors. Rather, in each transaction a lead investor negotiated various terms on behalf of the investors in that financing round. The terms were negotiated by the lead investor using a "term sheet," in which numerous terms were discussed, including share price, rights and preferences of the shares in liquidation or on sale of the shares, voting rights and agreements, antidilution provisions, information and registration rights, and rights of first refusal. The lead investor also was provided information by the company to conduct due diligence that was shared with the other investors. The shareholders participating in the financing, including the Respondent and Van Wagoner on behalf of the Funds, entered into agreements regarding several of the provisions negotiated.
7. As a result of the above, Respondent's series of investments in the private companies at the same time as the Funds' investments constituted joint arrangements.
8. Prior to making the nine investments, neither Respondent nor the Adviser, nor the board of the Funds sought exemptive relief from Rule 17d-1 under the Investment Company Act, which prohibits persons affiliated with registered investment companies (including directors) from participating in any joint enterprise or other joint arrangement in which such registered investment company is a participant without submitting to the Commission an application for the approval of the transaction. See 17 C.F.R. ยง 270.17j-1(a).
9. As a director of the Funds, Respondent was required to submit quarterly reports describing his own personal investments pursuant to Rule 17j-1(d). Although Respondent submitted quarterly reports, he did not describe any of his investments in the nine private placements in the quarterly transaction reports he submitted to the Funds during 1998, 1999 and 2000.
10. Between 1998 and July 2000, when he resigned, Respondent was paid fees for attendance at meetings of the board of directors of the Funds in the total amount of $13,500.
11. As a result of the conduct described above, Respondent willfully1 violated Rule 17d-1(a) under the Investment Company Act. Rule 17d-1(a) prohibits a registered investment company's director from participating as a principal, or effecting transactions, in connection with "joint enterprises" or other "joint arrangements" in which the registered investment company is a participant, without having first filed with the Commission an application, approved in an order, regarding such joint enterprise or arrangement.
12. As a result of the conduct described above, Respondent willfully violated Rule 17j-1(d) under the Investment Company Act. Rule 17j-1(d) requires each director of a registered investment company to report quarterly to the registered investment company, within 10 days after the applicable quarter end, transactions the director effected during the quarter in securities that he knew, or in the ordinary course of fulfilling his duties as a director should know, the investment company also purchased or sold, or considered purchasing or selling, during the 15-day period immediately before or after his own transaction in the securities.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Colman's Offer.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 9(f) of the Investment Company Act, that Respondent Colman cease and desist from committing or causing any violations and any future violations of Rules 17d-1(a) and 17j-1(d) under the Investment Company Act.
B. IT IS FURTHER ORDERED that Respondent shall, within 10 days of the entry of this Order, pay disgorgement of $13,500, representing his director fees for the period in question, plus prejudgment interest of $3,300, for a total amount of $16,800, to the United States Treasury. Such payment shall be: (i) made by United States postal money order or wire transfer, certified check, bank cashier's check or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (iv) submitted under cover letter that identifies Colman as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Helane L. Morrison, District Administrator, San Francisco District Office, Securities and Exchange Commission, 44 Montgomery Street, Suite 1100, San Francisco, California, 94104.
C. IT IS FURTHER ORDERED that Respondent shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of $25,000 to the United States Treasury. Such payment shall be: (i) made by United States postal money order or wire transfer, certified check, bank cashier's check or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (iv) submitted under cover letter that identifies Colman as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Helane L. Morrison, District Administrator, San Francisco District Office, Securities and Exchange Commission, 44 Montgomery Street, Suite 1100, San Francisco, California, 94104. Such civil penalty may be distributed pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002 ("Fair Fund distribution"). Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant to the Order shall be treated as penalties paid to the government for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, respondent agrees that he shall not, in any Related Investor Action, benefit from any offset or reduction of any investor's claim by the amount of any Fair Fund distribution to such investor in this proceeding that is proportionately attributable to the civil penalty paid by Respondent ("Penalty Offset"). If the court in any Related Investor Action grants such an offset or reduction, Respondent agrees that he shall, within 30 days after entry of a final order granting the offset or reduction, notify the Commission's counsel in this action and pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the commission directs. Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed against Respondent in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a private damages action brought against Respondent by or on behalf of one or more investors based on substantially the same facts as alleged in the Order in this proceeding.
By the Commission.
http://www.sec.gov/litigation/admin/ic26581.htm
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