S.E.C. v. Ki.W. Brown and Co.

Decision Date19 December 2007
Docket NumberNo. 05-80367-CIV.,05-80367-CIV.
Citation555 F.Supp.2d 1275
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. K.W. BROWN AND COMPANY, 21st Century Advisors, Inc., K.W. Brown Investments, Inc., Kenneth Brown, Wendy Brown, and Michael Cimilluca, Jr., Defendants.
CourtU.S. District Court — Southern District of Florida

Brian Barry, Senior Trial Counsel and Christopher E. Martin, Senior Trial Counsel for the SEC.

James B. Koch, Esq., Gardiner Koch & Weisberg, Chicago, IL, for Defendants.

Thomas F. Burke, Esq., The Law Office of Thomas F. Burke, P.C, Chicago, IL, for Defendant Michael Cimilluca.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

LINNEA R. JOHNSON, United States Magistrate Judge.

THIS CAUSE came on for non-jury trial before the undersigned United States Magistrate Judge by consent of the parties. The trial lasted nine days, commencing September 10, 2007. Based upon the evidence and testimony submitted, and considering the relevant statutes and case law, this Court finds in favor of the Plaintiff and against the Defendants. A final judgment to that effect shall be entered by separate order simultaneously herewith. Pursuant to the requirements of Federal Rule of Civil Procedure 52, the following findings of fact and conclusions of law are hereby issued.

I. NATURE OF THE CASE

Plaintiff, the Securities and Exchange Commission (the "SEC") has filed the instant action for injunctive and other relief against Defendants K.W. Brown & Company ("Brown & Company"), 21st Century Advisors, Inc. ("21st Century"), (collectively the "Advisers"), K.W. Brown Investments, Inc. ("Brown Investments"), Kenneth Brown ("Ken Brown"), Wendy Brown ("Wendy Brown") and Michael Cimilluca ("Cimilluca") (collectively "Defendants"), for alleged violations of the anti-fraud and books and records provisions of the federal securities laws. The Complaint sounds in five counts, all involving an alleged cherry-picking scheme which Plaintiff contends netted the Defendants more than 4 million dollars while illegally passing more than 9 million dollars of losses onto unsuspecting investors who had placed their trust in Ken Brown and the Investment Advisers.

Specifically, the Complaint alleges: violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") against Defendants Brown & Company, 21st Century, and Ken Brown (Count I); violations of Section 10(b) and Rule 10(b)-5 of the Securities Exchange Act of 1934 ("Exchange Act") against Defendants Brown & Company, 21st Century, and Ken Brown as primary violators and Defendants Cimilluca and Brown Investments as aiders and abettors (Count II); violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act") against Defendants Brown & Company and 21st Century, as primary violators and Defendants Ken Brown, Cimilluca and Brown Investments as aiders and abettors (Count III); violations of Section 207 of the Advisers Act against Defendants Brown & Company, 21st Century, Ken Brown and Wendy Brown (Count IV); and, violations of Section 204 and Rules 204-l(a)(2) and 204-2(a)(8) of the Advisers Act against Defendants Brown & Company and 21st Century as primary violators and Ken Brown and Wendy Brown as aiders and abettors.

II. FINDINGS OF FACT
Defendants

1. Defendants Ken and Wendy Brown are married and are residents of Manalapan, Florida. (Stipulated & Defendants Answer to Complaint ¶ 8).

2. Ken Brown is a self-proclaimed "Nationally Recognized Financial Radio Talk Show Host" who hosts a talk show every weekday morning and evening on a Palm Beach, Florida radio station. (Trial Testimony ("TT") 1144-48, Vol. 6 & Ex. 655). He was formerly the CEO of Brown & Co. and is a registered representative of Brown Investments. (Defendants Answer to Complaint ¶ 7). In addition, he was the registered representative for the 180 Account or Brown Trading Account. (Stipulated).

3. Ken Brown is also the primary fundraiser for the Advisers and conducts galas and the radio shows to attract prospective investors. (TT 346 & 356, Vol. 2).

4. Wendy Brown was the President of Brown Investments until June 2005, and is a registered representative of Brown Investments. (Defendants Answer to Complaint ¶ 8).

5. Ken and Wendy Brown control Defendant 21st Century and own 100% of its stock. (Stipulated). 21st Century is a Florida corporation with its principal place of business in Delray Beach, Florida. 21st Century has been registered with the Commission as an investment adviser since 1985. (Defendants' Answer to Complaint ¶ 5). Ken Brown is the President and Wendy Brown is the Secretary and Treasurer of 21st Century. (TT 1091-1092, Vol. 6 & Stipulated).

6. Ken and Wendy Brown also control Defendant Brown & Company and Defendant Brown Investments and they are trustees for the Brown Family Trust that own 100% of Brown Investments and Brown & Company's stock. Ken Brown is a founding partner and current Chief Financial Officer, OP, MP, Director, and Chairman of the Board of Brown & Company and Brown Investments. (Stipulated & TT 1083-92, Vol. 6). Wendy Brown is a founding partner and current Secretary/Treasurer of Brown & Company and Brown Investments. (Stipulated & TT 1083-92, Vol. 6).

7. Defendants 21st Century and Brown & Company are investment adviser firms registered with the Commission that operate their principal place of business at 401 W. Linton Ave., Delray Beach, Florida. Nearly all of the clients of 21st Century and Brown & Company entered into written agreements giving 21st Century and/or Brown & Company discretionary authority over clients' accounts. Since these entities are registered with the Commission, they are required to keep true, accurate and current books and records and complete a disclosure document called a FORM ADV. Part I of its FORM ADV is filed with the Commission on at least an annual basis and contains disclosures regarding, among other things, the amount of assets and accounts under management. Part II of the FORM ADV is maintained at the adviser's principal place of business but is still considered filed with the Commission and contains disclosures regarding, among other things, conflicts of interests. (Stipulated).

8. As of the date of trial the Advisers still had approximately $57 million of investors' funds under management. (TT 455, Vol. 3).

9. Defendant Brown Investments is a Florida corporation with its principal place of business in Delray Beach, Florida. (Admitted). Brown Investments has been registered with the Commission as a broker-dealer since 1985. (Admitted). Ken and Wendy Brown own and control Brown Investments. (Admitted).

10. After registering Brown & Company as an investment adviser, Ken and Wendy Brown began transferring 21st Century client accounts to Brown & Company. (TT 359-61, Vol. 2; TT 831, Vol. 4; TT 1113-18, Vol. 6 & Ex. 621).

11. Defendant Cimilluca is a resident of Coral Springs, Florida. (Stipulated). He is a registered representative of Brown Investments. (Defendants Answer to Complaint ¶ 9). In September 2002, Cimilluca was hired to day trade the Brown Investments' proprietary account (the "Brown Trading Account"). (Defendants Answer to Complaint ¶ 2)

12. Day trading means buying and selling (or shorting and covering) a security within a single trading day. (TT 1595, L. 11-14, Vol. 8).

13. Cimilluca also day traded several other accounts at Brown Investments even though, for more than four years, he repeatedly testified under oath that he did not make the trading decisions for any account other than the Brown Trading Account. (TT 505-09 & 547-563, Vol. 3). During a 2007 deposition, he finally admitted he traded a personal account but still denied he made trading decisions for any other accounts. (TT 555, Vol. 3). After several witnesses and scores of documents contradicted his story, Cimilluca changed his story at the beginning of the trial and admitted he made all trading decisions for a number of other accounts and even received under-the-table payments for managing at least one of those accounts. (TT 551-64, Vol. 3).

14. These "Cimilluca Accounts" were for himself, individuals who played or coached on the same baseball team as Ken Brown and Cimilluca, his in-laws, and business associates of his in-laws and achieved an incredible 99.65% success rate for day trades—281 out of 282 day trades were profitable. (TT 551-64, Vol. 3; TT 1029-32, Vol. 5; TT 1280-86 & 1453, Vol. 7 & Exs. 816, 875, 878-79).

15. From September 2002 through at least June 2006, Cimilluca profited by day trading securities for the Brown Trading Account. (TT 1219, Vol. 6 & Stipulated).

16. Cimilluca had never day traded a proprietary account before, had been unsuccessful trading his own personal accounts, had received little or no training concerning day trading, and never articulated any trading strategy despite numerous opportunities in three separate sworn testimonies taken over a period of more than three years. (TT 611-13, Vol. 3). Ken Brown was aware that Cimilluca had never day traded before, had no training and did not have software telling him when to buy or sell. (TT 1228-30, Vol. 6).

17. Pursuant to Ken Brown's agreement with Cimilluca, Brown & Company paid Cimilluca 50% of all Brown Trading Account profits plus 1% of all commissions generated by the broker-dealer for processing the Advisers client trades. (TT 629-31, Vol. 3; TT 1223-24, Vol. 6 & Ex. 4). Additionally, Brown & Company listed him as the employee responsible for its trading desk and 21st Century identified him as being in charge of trading and operations. (TT 99-101, Vol. 1; TT 708, Vol. 4 & Exs. 7 & 620).

March 2003 Examination

18. In March 2003, the Commission's examination staff conducted an examination of the Advisers and identified several instances of improper trading as well as a lack of policies and procedures in place to detect such trading. In a June 10, 2003 letter, ...

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