S.E.C. v. Bolla

• Decision Date: 22 September 2005
• Docket Number: No. Civ.A. 02-1506 (CKK).,Civ.A. 02-1506 (CKK).
• Citation: 401 F.Supp.2d 43
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Steven M. BOLLA, Washington Investment Network, Susan Bolla, and Robert Radano, Defendants.
• Court: U.S. District Court — District of Columbia

401 F.Supp.2d 43

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Steven M. BOLLA, Washington Investment Network, Susan Bolla, and Robert Radano, Defendants.

No. Civ.A. 02-1506 (CKK).

United States District Court, District of Columbia.

September 22, 2005.

COPYRIGHT MATERIAL OMITTED

Kathleen A. Ford, San Francisco, CA, for Plaintiff.

Amy B. Jackson, Robert P. Trout, Trout Cacheris, PLLC, Laura H. McNeill, John E. Hall, Covington & Burling, Washington, DC, for Defendants.

MEMORANDUM OPINION

KOLLAR-KOTELLY, District Judge.

Plaintiff Securities and Exchange Commission ("SEC") filed this civil enforcement action on July 31, 2002, alleging various violations of the federal securities laws by Defendants Steven Bolla, Washington Investment Network ("WIN"), Susan Bolla, and Robert Radano. After the SEC reached a settlement in principle with Defendants Steven and Susan Bolla,¹ a bench trial occurred before this Court on July 26-28, 2004, during which the Court heard testimony relating to the allegations against the remaining Defendants, WIN and Robert Radano. WIN is charged with a primary violation of Sections 203(f), 206(1), and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"), while Mr. Radano is charged with aiding and abetting WIN's alleged violations. This Memorandum Opinion details the Court's findings of fact and conclusions of law, as required by Federal Rule of Civil Procedure 52(a). See Fed.R.Civ.P. 52(a) ("In all actions tried upon the facts without a jury... the court shall find the facts specially and state separately its conclusions of law thereon").

Based upon the credible evidence adduced at trial and all reasonable inferences to be drawn from the testimony of the witnesses and the documentary evidence in the case, the Court concludes that Defendants WIN and Robert Radano violated Sections 203(f), 206(1), and 206(2) of the Advisers Act. As such, pursuant to Federal Rule of Civil Procedure 58, the Court shall enter judgment in favor of the SEC, shall issue injunctions barring Defendants from future violations of these provisions, and shall impose a civil money penalty fine of $15,000 against Mr. Radano and a civil money penalty fine of $50,000 against WIN.

I: PRELIMINARY FINDINGS OF FACT

Background

1. Defendant WIN is an investment adviser located in Bethesda, Maryland. Pl.'s Ex. 40, 42; Burdette Dep. 52:23-53:2; Radano Dep. at 13:16-14:4; Radano Investigative Test. 20:5-7; Trial Tr. at 44:17-18, 55:7-11, 55:21-56:4, 71:25-72:16, 97:21-98:4, 101:14-102:10, 106:12-107:1, 113:25-114:4, 119:12-19, 126:11-17, 131:19-24, 132:22-135:15, 136:5-12, 339:22-24, 379:18-21. Since 1997, WIN has been a registered investment adviser operating as an investment consulting entity. J. Pre-Tr. Stmt., Stipulation # 1. WIN is currently registered as an investment adviser in the State of Connecticut, Pl.'s Ex. 42, 53, 65-68, Trial Tr. 119:12-19, Radano Investigative Test. 83:22-84:14, 85:20-22, and was formerly registered as an investment adviser in the Commonwealth of Virginia, Pl.'s Ex. 40, 43, Radano Dep. at 19:3-11, Trial Tr. at 102:2-4.

2. Defendant Robert Radano is also a resident of Bethesda, Maryland, Radano Dep. at 3:9-12; Trial Tr. 262:7-8, and has been an investment adviser registered with the State of Connecticut since 1998, Pl.'s Ex. 42, 53, 65-68, Radano Dep. at 4:25-5:14; Trial Tr. 101:4-7, 119:12-19, 144:23-25, 262:23-24, 268:1-5. Mr. Radano graduated from George Washington University in 1977 with a B.A. in Political Science. From 1977 through 1985, Mr. Radano worked in various political positions, including as a congressional aide. In 1985, he became a Series 7 registered broker with Legg Mason in Washington, D.C. From 1985 through 1997, Mr. Radano worked in various Series 7 broker positions for Legg Mason; Shearson, Lehman and Hutton; and Washington Investment. In March 1997, Mr. Radano obtained his Series 65 and became a registered investment adviser. Radano Dep. at 4:4-20, 4:25-5:14.

Steven Bolla and the Origin of the Business Relationship with Lockwood Financial

3. In the late 1990s, Defendant Steven Bolla began working as an investment adviser with Lockwood Financial Services, Inc. ("Lockwood"), a broker-dealer and registered investment adviser that acted as a third-party administrator for a large group of highly regarded money managers. Bolla Dep. at 16:1-17;² Burdette Dep. at 6:10-14, 25:21-24; Radano Dep. at 11:10-12:8; Trial Tr. at 276:9-15. Formed in 1996 by former executives from Smith Barney, Lockwood is based in Malvern, Pennsylvania, with branch offices across the country. By the year 2000, when events relevant to this case occurred, Lockwood had over $6 billion in assets under management. Burdette Dep. at 8:3-13, 9:8-15.

4. Lockwood's business model was to serve as a nexus between investment advisers and institutional money managers by offering an investment vehicle known as a "wrap" account. Trial Tr. at 277:9-19; Bolla Dep. at 16:1-17:2. These "wrap" accounts allowed individual clients of Lockwood's affiliated investment advisers to pool their assets to meet the rather large minimum investment amounts required by Lockwood's institutional money managers. Burdette Dep. at 9:20-24; Radano Dep. at 32:7-19; Trial Tr. at 277:9-19, 277:20-278:16.

5. Lockwood had no sales force; rather, it attracted clients for its investment adviser business through arrangements with individual investment advisers who referred their client assets to Lockwood. Bolla Dep. at 11:17-12:8; Trial Tr. at 276:9-277:8, 283:3-15. Clients referred to Lockwood by an individual investment consultant entered into a separate contract with Lockwood, and became clients of Lockwood as well. Bolla Dep. at 18:17-19:17; Burdette Dep. at 10:6-9, 61:18-62:14; Trial Tr. at 47:11-13, 71:8-18, 283:20-284:6; Pl.'s Ex. 19.

6. Under Lockwood's "Managed Account Link" program, Lockwood handled all account administration and charged the client a single "wrap fee" for the overall management and servicing of the client's account, out of which Lockwood retained an "advisory fee" for itself and paid fees to the clearing agent (generally, Charles Schwab & Co.), the money managers, and the individual investment advisers, each of whom received fees based generally upon a percentage of the assets that the client had invested. Bolla Dep. at 16:1-17:2, 24:21-25:7, 25:22-26:4; Burdette Dep. at 15:4-17:25; Trial Tr. at 277:2-280:24; Pl.'s Ex. 22, 23-30; Defs.' Ex. J, K.

7. Each individual investment adviser who referred clients to Lockwood was given a unique four-letter "rep code" to record the source of the client referral and also to determine to whom the consultant fee payments should be remitted. Burdette Dep. at 13:5-11, 14:11-15:16. Mr. Bolla was assigned the rep code "OFAA." Bolla Dep. at 24:6-11; Burdette Dep. at 12:19-13:4, 27:11-20.

Bolla, Robert Radano, and the Creation of WIN

8. Defendant Robert Radano, who knew Mr. Bolla professionally from their prior broker-dealer work, was attracted to the Lockwood model; however, unlike Mr. Bolla, Mr. Radano did not have any client assets that he was in a position to refer to Lockwood, nor was Mr. Radano at that time licensed as an investment adviser. Trial Tr. at 263:20-264:25; 270:2-271:19, 287:24-288:23. Despite his lack of client assets, Mr. Radano believed that he would eventually build a referral business by soliciting certified public accountants ("CPAs") in the Washington, D.C., area and agreeing to share the Lockwood referral fees with the CPAs whose clients chose to invest assets through Lockwood. Trial Tr. at 281:282:24.

9. Upon reaching a mutual understanding, Messrs. Bolla and Radano decided to form WIN as a vehicle through which they could work as individual investment advisers with Lockwood, with each person receiving his share of the Lockwood consultant fees attributable to his efforts. Radano Dep. at 32:25-34:5, 37:12-23, 38:7-17, 41:10-42:3, 43:79; Bolla Dep. at 19:14-20:8; Trial Tr. at 274:16-275:10, 283:20-284:9, 285:15-286:9. In addition to the client investments with the Lockwood institutional money managers, WIN clients also invested with Mount Lucas Management ("MLM"), an independent money manager. Pl.'s Ex. 48, 49; Bolla Dep. at 35:21-36:10, 100:1-5; Radano Dep. at 54:2-55:7; Trial Tr. at 411:9-412:25. MLM was initially a money manager option for clients through Lockwood but when MLM and Lockwood disassociated, some clients of Mr. Bolla and Mr. Radano retained their investments there, and MLM sent payments for the consultant fee component of those accounts directly to WIN. Id.

10. In 1999, WIN registered as an investment adviser in the Commonwealth of Virginia. Pl.'s Ex. 43; Radano Dep. at 19:13-21; Trial Tr. at 101:25-102:4. In June 2000, the State of Connecticut approved WIN's registration as an investment adviser in that state. Pl.'s Ex. 42; Trial Tr. at 102:5-10, 119:12-19. WIN received compensation for providing advice to its clients relating to securities investments. Pl.'s Ex. 22, 23-30; Defs.' Ex. J, K; Grotto Dep. at 25:24-26:11; Radano Dep. at 43:24-44:2; Trial Tr. at 286:10-17, 301:22-302:3. Lockwood and MLM deducted WIN's advisory fees from client accounts, and sent those fees via check to WIN. Pl.'s Ex. 22, 23-30, 47-49; Defs.' Ex. J, K; Burdette Dep. at 27:22-28:8, 39:4-12; Bolla Dep. at 25:22-26:4, 29:12-25, 36:5-10, 115:19-21; Investigative Test. 146:25-147:2, 148:3-12, 148:22-149:14, 244:21-245:7; Trial Tr. at 218:24-219:2. Client account forms designated WIN as the investment advisory firm, Pl.'s Ex. 3, 5, 19, 21, 60, 61, and WIN clients such as Nancy DeFelice and Karen Grotto considered WIN to be their investment adviser, Grotto Dep. at 10:6-12; Trial Tr. at 44:17-18, 55:7-11, 55:21-56:4, 71:25-72:16, 97:21-98:4.

11. When Mr. Radano and Mr. Bolla formed WIN, Mr. Radano knew that the SEC was investigating Mr. Bolla's conduct with respect to another investment advisory firm, Trustcap Financial Group ("Trustcap"). Radano Dep. at...