Full opinion text
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 Cimillu-ca 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 Manala-pan, 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, Cim-illuca 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, (the “Deficiency Letter”) the examination staff notified Ken Brown and the Advisers about these deficiencies. Employees or Consultants Employed by the Corporate Defendants 19. Ken and Wendy Brown never relinquished their control of the Brown Entities. At various times other individuals were given senior management titles. These individuals, however, always reported to Ken and/or Wendy Brown, were at-will employees with only oral contracts, never owned equity in any of the Brown Entities, and most importantly, were frequently unqualified to hold those positions and devoid of any authority to implement meaningful changes. (TT 290-91, 322-23 & 340-41, Vol. 2). 20. One such individual is Jerry Desid-erio, the current President of Brown & Company and the Chief Compliance Officer of Brown & Company and 21st Century. (TT 425 & 433, Vol. 3). Desiderio has been in the securities industry since the 1970’s but he never even held a securities license until 1996. (TT 419, L. 8-12, Vol. 3). Until Ken Brown hired him in July/August 2003 to work in operations at 21st Century, Desiderio was unemployed, had previously worked a series of jobs for less than three years, and had never filled out a Form ADV. (TT 419-22, Vol. 3 & Stipulated). 21. When Ken Brown hired Desiderio as an at-will employee with merely a verbal contract, he did not tell Desiderio the Commission sent Ken Brown a Deficiency Letter identifying specific concerns about the Advisers’ books and records and improper trading in the Brown Trading Account. (TT 423-24 & 429, Vol. 3). 22. From May 2004 through 2005, De-siderio’s duties at 21st Century focused on bringing the firm’s annuity information up to date. (TT 425-26, Vol. 3). Desiderio obtained a supervisory license in May 2004 and became the President of Brown Investments in June 2005. (TT 422-425, Vol. 3) Although he is currently the Chief Compliance Officer for all of the Brown Entities, even at trial, Desiderio did not know he held the title of Chief Compliance Officer for Florida Investment Advisory Services, another Brown-controlled entity. (TT 431-33, Vol. 3 & Ex. 451) Despite these titles, Desiderio is still an at-will employee who holds no ownership interest in any of the Brown Entities and receives a salary plus a bonus equal to a percentage of the Advisers’ assets under management. (TT 429-434, Vol. 3). 23. Desiderio testified he placed Cimil-luca on an unpaid leave of absence after Cimilluca admitted to Desiderio he traded the Cimilluca Accounts “without any of the proper disclosures and without any power of attorneys” and received cash under-the-table to trade at least in one of the Cimil-luca Accounts. (TT 508-10, Vol. 3). 24. Although Desiderio knew Cimilluca lied about trading the Cimilluca Accounts under oath during his depositions, he never conducted further investigation concerning Cimilluca’s actions and Brown & Company did not fire Cimilluca. He was simply placed on unpaid leave “until the upcoming trial [sic] ... reaches its conclusion” (Id. & Ex. 516). 25. Another individual, Patrick Castelli, was hired about the same time as Desider-io. (TT 257, Vol. 2). Castelli responded to an advertisement on the CFA Institute website seeking a chartered financial analyst to conduct research. (TT 257-58, Vol. 2). However, when Castelli interviewed, Ken Brown told him he needed someone to help bring the data in their portfolio management software, Advent, up to date. (TT 258-60, Vol. 2). Although Castelli had never worked with the Advent system, he accepted Ken Brown’s job offer and from August/September 2003 to July 2004 worked alongside Desiderio updating portfolio data contained in the firm’s Advent system. (TT 259-61 & 264-65, Vol. 2). 26. Castelli also attended the Investment Committee meetings and, like Was-serman, another 21st Century employee, testified the Committee only discussed general market conditions, not specific equities, and Ken Brown made all decisions. (TT 278-83, Vol. 2 & Ex. 125). 27. Ken Brown gave Castelli the title of CEO for 21st Century. Despite this title, Ken Brown never relinquished any control to him and routinely ignored Cas-telli’s recommendations although he spoke to Castelli about increasing his responsibilities in the future. Furthermore, no employees reported to Castelli and Castelli himself reported to Ken and Wendy Brown. (TT 266-68, Vol. 2). 28. During his 2004 investigative testimony, Castelli was surprised to learn he was listed as the Chief Compliance Officer for all the Brown Entities since he never had any compliance related responsibilities. (TT 277-78 & 302-04, Vol. 2 & Ex. 30). Furthermore, Castelli never supervised Cimilluca and had little, if any, interaction with him. (TT 277-78, Vol. 2). 29. 21st Century also employed Donald Wasserman for many years. Mr. Wasser-man attended Investment Committee meetings, chaired by Ken Brown. The Investment Committee discussed current economic situations, the markets, and how to allocate advisory client mutual fund and annuity assets to certain sectors. The Investment Committee did not discuss individual stocks and Ken Brown ultimately made all of the decisions. (TT 1388, Vol. 7 & Ex. 883 & Stipulated) 30. For at least part of his time with K.W. Brown Investments, Ken Brown asked Mr. Wasserman to “sign off’ on daily trade tickets. This was not a substantive review of the trades, but rather a clerical review at the end of the day to ensure the hundreds of tickets processed that day were filled out correctly. He did not review nor was he aware of any log or other document that identified whether the Brown Trading Account or other related accounts traded in the same securities as advisory clients. (TT 1388-89, Vol. 7 & Stipulated) 31. Mr. Wasserman never supervised any registered representatives nor did he have any compliance responsibilities. Although he knew Cimilluca and knew Cimil-luca traded a proprietary account for Ken Brown, he did not supervise or otherwise interact with Cimilluca. Mr. Wasserman did not see the Deficiency Letter the SEC’s examination staff sent to Ken Brown and he was not aware the SEC expressed any concerns about trading in the Brown Trading Account. Additionally, Mr. Wasserman was not aware of any policies and procedures in place concerning personal trading activity at K.W. Brown Investments. (TT 1389, Vol. 7) 32. Regarding books and records, Mr. Wasserman did not know the SEC’s examination staff cited books and records deficiencies. He played no role in preparing Forms ADV for the investment advisers and did not review any Forms ADV. Furthermore, he understood Wendy Brown was responsible for maintaining the books and records and filing its Forms ADV. CM) 33. Francine Oelbaum worked for KW Brown in compliance and as a sales assistant in the 1990s. After voluntarily leaving the firm, she came back in January 2001 in compliance and as a sales assistant for Ken Brown and others. She stayed with KW Brown through February 2006 when she voluntarily left KW Brown. (TT 331, Yol. 2). During her second stint she only stayed in compliance for approximately six months since Ken Brown was not fond of rules and regulations. (TT 332-33, Vol. 2). Moreover, she eventually left KW Brown in 2006, because, among other reasons, she was concerned about the high number of arbitration cases, high amount of investor turnover, and high number of investor complaints. (TT 333-34 & 388, Vol. 2). She acted as a conduit for investor complaints that Ken Brown received, and used to keep a log of them. One day Ken Brown saw this log in her possession and got very upset about it, took the file away, and said what are you trying to do get me in trouble? (TT 335, Vol. 2). 34. One of Ms. Oelbaum’s duties as a sales assistant was to print-out a report showing which accounts had cash, a/k/a the money line. (TT 344-45, Vol. 2). Defendant Cimilluca could run this report as well. (TT 345, Vol. 2). Ken also wanted a report showing all accounts that had activity from the day before. (TT 361, Vol. 2). 35. The Defendants also engaged a consultant, Gail Smith, for two brief time periods. (TT 1026-29, Vol. 5 & Ex. 877). In late 2002 or early 2003, the Defendant entities retained Ms. Smith to perform cost analysis of overhead expenses. She completed her engagement in a few months and recommended some vendor changes and/or contract amendments to Ken and Wendy Brown. (TT 1027, L. 6-11, Vol. 5). She recently started working at the Defendant entities’ office location for this engagement when the Commission conducted its routine examination in March 2003. (TT 95, L. 2-8, Vol. 1). 36. For both engagements, Ms. Smith worked as a consultant and not an employee or officer of any Defendant entity. (TT 1027, L. 12-19, Vol. 5 & Ex. 877). She reported directly to Ken and Wendy Brown and only to Ken and Wendy Brown. (Id.) Although she did not recall Ken Brown’s titles at the firms, she believed he was the control person. (Id.) She understood Wendy Brown to be the president and compliance officer who performed managerial duties for the firms. (Id.) 37. Ms. Smith had no responsibilities regarding the forms ADV for any Defendant entity and did not create any of the information contained in the forms ADV such as the number of clients or assets under management. (TT 1027-28, Vol. 5 & Exs. 112 & 877). Additionally, she had no role in maintaining effective internal control systems, updating the value of mutual funds or annuities held by clients of the Defendant entities, or maintaining any other client account information. (Id.) Ken and Wendy Brown Control Virtually Every Aspect of the Corporate Defendants’ Operations 38. Specifically concerning the broker-dealer operations, Ken Brown’s testimony makes it abundantly clear Ken and Wendy Brown controlled virtually every aspect of those operations despite any titles assigned to employees: 1108 8Q And let’s look at those responsibilities for a moment. 9You and Wendy Brown had responsibilities for 10 hiring, registration of registered representatives and 11 associated persons; is that correct? 12 A Yes. 13 Q You and Mr. Wasserman had supervision responsibilities 14 of registered representatives and associated persons? 15 A Yes. 16 Q You and Mr. Wasserman both had the duty to review 17 transactions? 18 A Yes. 19 Q You had the duty for new ac- count review? 20 A Yes. 21 Q You had the duty to review customer accounts? 22 A Yes. 23 Q You and Wendy both had the duty to review 24 correspondence? 25 A Yes. 1109 1 Q You and Wendy both had the duty for customer complaints? 2 A Yes. 3 Q You had the duty for advertising, financials, and branch 4 office review? 5 A Yes. 6 Q You had other supervisory duties — or responsibilities? 7 Excuse me. You see that? 8 A Yes, sir. 9 Q You had duties for supervisor manual review, correct? 10 A Yes. Lot of hats. 11 Q And then turning to, it’s Bates stamped KWB 279, it’s 12 the third page of the document. You’re listed there as the 13 chief executive officer; is that correct? 14 A Yes. 15 Q The chief financial officer; is that correct? 16 A Yes. 17 Q Financial principal? 18 A Yes. 19 Q Record maintenance and retention? 20 A Yeah. 21 Q Municipal securities and direct participation programs? 22 A Yes. 23 Q And while you were a CEO at this point in time, Wendy 24 Brown was president, correct? 25 A Yes. 1110 1 Q And Mr. Wasserman, he was below both of you as vice 2 president, correct? 3 A Yes. 4 Q And turning back to the supervisory manual review, so it 5 was your responsibility to update the supervisory manual; is 6 that correct? 7 A Yes. 8 Q And you had the ultimate responsibility in reviewing the 9 supervisory manual? 10 A Yes. (TT 1105-12, Vol. 6 & Ex. 18). 39. Further, concerning the Brown Trading Account, Ken Brown had ultimate responsibility for the account. Ken Brown was the registered representative for the account; Ken Brown was the compliance principal; Ken Brown was the only supervisor for the broker-dealer for the entire time of this scheme; Ken and Wendy Brown reviewed the account activity; and Ken Brown’s name is on the door. (TT 468-69, Vol. 3; 1248-1249, Vol. 6; TT 1298 & 1300-02, Vol. 7 & Exs. 22 & 551). 40. Moreover, as the registered representative for the account Ken Brown could not give away his front-line or primary responsibility to monitor the 180 account. (TT 464, Vol. 3; TT 1249, Vol. 6; and TT 1587-88 & 1697, Vol. 8). Furthermore, Ken Brown admits that he could have, but did not stop Cimilluea from continuing to trade the 180 account. Since he hired Cimilluea, he could fire him but never did. (TT 1112-13 & 1226-28, Vol. 6). 41. Additionally, Ken Brown claimed he resolved the conflict where Cimilluea traded for the Brown Trading Account and entered trades for the Advisers’ clients by hiring Cimilluca’s father to enter trades for the Advisers’ clients trades. (TT 1297, L. 9-14, Vol. 7). Other than the obvious problem that the person Ken Brown hired to eliminate the conflict was Cimilluca’s father who held no securities license (TT 678, L. 4-6, Vol. 4 & TT 1297, L. 9-14, Vol. 7), Cimilluea and his father shared an office so there was no barrier isolating the Brown Trading Account trader from the person entering Advisory Client trades. (TT 520-23, Vol. 3; TT 1297, Vol. 7). Furthermore, even Cimilluea said he still entered Advisory Client trades when his father was out of the office. (TT 678, L. 1-3, Vol. 4). The Advisers Forms ADV Misled Their Advisory Clients 42. As investment advisers registered with the Commission, 21st Century and Brown & Company are required to keep true, accurate and current books and records and complete a disclosure document called a Form ADV. (Stipulated). Intentional misstatements or omissions in Forms ADV constitute federal criminal violations. (TT 456-57, Vol. 3 & Ex. 363). 43. In the Form ADV, the Advisers responded affirmatively that they had numerous past regulatory problems (TT 445-46, Vol. 3). In addition, Ken Brown’s disciplinary history with the State of Florida prevented him from acting in a supervisory capacity for two years during the late 1990’s. (TT 329, Vol. 2). 44. Wendy Brown updated then filed all of the Advisers’ Forms ADV after Ken Brown reviewed them. (TT 884-85, Vol. 5 & TT 1110, L. 11-24, Vol. 6). She filed at least two of the Forms ADV late (TT 875, L. 11-13, Vol. 5), reported assets under management which were not supported by the Advisers’ backup documentation on at least 5 additional occasions, and provided false and misleading disclosures concerning the Brown Trading Account continuously over a period of more than 4 years. (TT 836, 847-48, 858-60, Vol. 4; TT 900-01 & 912-14, Vol. 5 & Exs. 419, 422-24, 428, 436, 444, 504-07). 45. Part I of the 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. (TT 876-877, Vol. 5 & Stipulated). 46. Even after the Commission’s examination staff cited the Advisers failure to provide sufficient documents to support their reported assets under management in the Deficiency Letter, the Advisers continued to report erroneous or unsupported amounts of assets under management for the next four years and filed late twice, one time filing almost 8 months late. (TT 858, Vol. 4; TT 875, 887-94 & 900-01, Vol. 5 & Exs. 21A, 424, 444 & 506-07). 47. Even though the Form ADV clearly states on the signature page the person filing the Form ADV certifies under penalty of perjury “that the information and statements made in this ADV, including exhibits and any other information submitted, are true and correct,” Wendy Brown admitted she only bothered to verify the amount of assets under management once, but she could not recall for which Form ADV filing or for which Adviser. (TT 880-84, Vol. 5 & Ex. 438). 48. Although Wendy Brown testified she maintained physical files of documents to support the reported assets under management, the Defendants never produced any documents reflecting the amounts the Advisers reported to the Commission’s ex-animation staff, the Commission’s investigative staff, or the Commission in this litigation. (TT 106-07, Vol. 1; TT 491-504, Vol. 3; TT 879-82 & 890-95, Vol. 5 & Exs. 135 & 504-11). 49.The custom and the practice in the industry is that investment advisers should be able to produce third-party back-up to support the amount of assets under management. (TT 1551-53, Vol. 8). 50.In fact, the Commission’s investigative staff requested all documents supporting the reported amounts of assets under management for several time periods. (TT 879-80 & 890-91, Vol. 5 & Exs. 508-09 & 511). After repeated requests, the Advisers produced disorganized and insufficient documentation that, even viewed in the most favorable light, contradicted the amounts reported. The chart below contains those figures: (TT 879-80 & 890-95, Vol. 5 & Exs. 504-511). Brown & Company ADV Date Reported Accounts / Assets Accounts / Assets Per Docs 12/20/02_400 / $30,825,000_400 / $35,889,839.76 7/22/03 700 / $65,269,414 500 / $47,789,364 21st Century ADV Date Reported Clients!Assets Clients / Assets Per Docs 4/08/03_500 / $ 36,000,000 _620 / $85,838,739 3/30/04_630 / $126,300,000 / $64,081,422 51. Desiderio filed Brown & Company’s Form ADV annual amendment in June 2007. (TT 443-48, Vol. 3 & Ex. 418). Brown & Company’s assets under management, however, had dwindled from more than $80 million to less then $3 million and from 1170 accounts to only 65 accounts in the year since its last amendment. (TT 452-53, Vol. 3; TT 908-910, Vol. 5 & Exs. 418 & 470). 52. In fact, the assets had dropped below the $25 million threshold for a Commission registered investment adviser so Brown & Company’s Form ADV indicated that, as an affiliate of 21st Century, it was relying on a “piggyback” exemption that waives the asset threshold for an affiliate of an investment adviser managing more than $25 million in assets. (TT 443-44, Vol. 3 & Ex. 418). 53. By comparison, Wendy Brown had recently reported more than $5 billion for assets under management in 21st Century’s annual amendment and failed to disclose the Commission’s lawsuit. (TT 900-01, Vol. 5 & Ex. 444). Almost four months later, 21st Century corrected this amount to report approximately $54 million in assets under management and 883 accounts. (TT 451-55, Vol. 3; TT 910, Vol. 5 & Ex. 470). 54. Wendy Brown filed 21st Century’s Form ADV annual amendment on March 21, 2007, reporting more than $5 billion for its assets under management and left that misrepresented amount on the Form for all of their clients and potential clients to see and rely on for almost four months until July 2007. (TT 900-01, Vol. 5 & Exs. 444, 419). 55. More than four years after the Commission’s examination staff cited deficiencies in the Advisers regulatory reporting and after continuous investigation and this litigation by the Commission, Wendy Brown still carelessly filed the Advisers’ Forms ADV. (TT 900-01, Vol. 5 & Ex. 444). 56. Even when Wendy Brown corrected the reported assets under management, she failed to disclose, even as of trial, that the Securities and Exchange Commission sued 21st Century for fraud and other securities law violations. (TT 451, Vol. 3; TT 902-06, Vol. 5; TT 1206, Vol. 6 & Ex. 419). Both the Advisers and Ken Brown admit that 21st Century should have disclosed the SEC’s case. (TT 442-50, Vol. 3 & Exs. 433, 418-19 & 444). 57. Part II of the Form ADV (also known as the Disclosure Document) is maintained at Defendants’ principal place of business, but is still considered filed with the Commission and contains disclosures regarding, among other things, conflicts of interests. (Stipulated). 58. The Form ADV instructions expressly state “[f]ailure to update your Form ADV, as required by this instruction, is a -violation of SEC rule 204-1” and further states that an investment adviser “must update the information in your Part II whenever it becomes materially inaccurate.” (TT 855-56, Vol. 4 & Ex. 363 at 3). 59. Additionally, investment advisers must offer to provide Part II of the Form ADV to their clients at least once a year or when Part II is updated to reflect material changes and the Advisers had clients specifically request an updated Part II of Form ADV. (TT 967-69, Vol. 5 & Ex. 31). 60. The Forms ADV, Part II for Brown & Company and 21st Century, as of August 23 and June 18, 2002, respectively, expressly informed advisory clients: The firm or its affiliates may take positions in the same securities it recommends to clients, under no circumstances will the firm place its own interest ahead of our clients, nor will the firm take a position which could be detrimental to our clients position. (Ex. 17 at KWB 00273 & Ex. 23 at KWB 00360). 61. This disclosure and therefore the Advisers’ Forms ADV, Part II became materially inaccurate when Cimilluca started trading the Brown Trading Account in September 2002. (TT 437, Vol. 3 & Exs. 17, 21A & 23). 62. Seven months after their Form ADV, Part II became materially inaccurate, the Advisers had not updated Part II. The Commission’s examination staff discussed this failure in the Deficiency Letter, stating “the Advisers’ Form ADV is inadequate and misleading because it failed to make complete and accurate disclosure of such conflicts required by Item 9 of Form ADV Part II” and it specifically identified the “ADVs fail to disclose that (1) related accounts will trade on the same day as clients and receive better prices than clients and (2) that the Advisers’ related accounts and their trader had a financial interest and would profit, at the possible expense of clients, when executing clients’ trades.” (TT 133, Vol. 1 & Ex. 21A) The Advisers’ Forms ADV Continued to Mislead the Advisory Clients 63. After receiving the Deficiency Letter, the Advisers updated their Form ADV, Part II disclosures. (TT 847-48, Vol. 4 & Ex. 414). However, the updated disclosure below only served to further mislead the Advisory Clients and the Commission, stating: The firm or its affiliates may take positions in the same securities it recommends to its clients; the affiliated broker/dealer maintains an actively traded (primarily a day trading account) solely for its own trading profits that can be considered a conflict of interest to advisory clients in so much as the trading does take positions that are also simultaneously being recommended to advisory accounts. The firms [sic] trading account has a short-term objective while advisory accounts generally are for retaining positions for a longer term objective. The advisor does not utilize client’s [sic] funds nor does the advisor take positions large enough to influence market price movement or fluctuation. The advisor does not engage in scalping or front running securities. The conflict is entirely coincidental and could be entirely possible if the positions are not obtained for the advisory client. It may result in having missed or lost opportunity. If not obtained for clients of differing time objectives it’s the advisors position that under no circumstances will the firm place its own interest ahead of our clients, nor will the firm take a position which could be detrimental to our clients [sic] position. It is also entirely possible that the broker/dealer affiliate can and does often receive better prices on these same day trades or can trade in an opposite direction of its clients, however this is an inadvertent event due to market fluctuation and not a planned or predetermined occurrence. Prices fluctuate randomly. (Ex. 414, emphasis added). 64.Although the Advisers stated the Advisory Clients retain positions for long term objectives, at trial the Commission introduced account records for the Advisory Clients showing the Advisers often sold Advisory Clients out of positions in just a few short days and at a loss for the Advisory Client. (TT 1162-63, Vol. 6 & Ex. 133). Judge Barry Stone, an advisory client, testified that in seven specific transactions he suffered both unrealized losses and realized losses after a short holding period. (Exs. 715-727). Additionally, the Defendants’ own expert reviewed examples of realized losses suffered by the Advisers’ clients after only holding the positions for a short time period. (TT 1741-1755, Vol. 9 & Exs. 552-53, 555 & 992-94). 65. Additionally, the statement “[t]he advisor does not utilize client’s [sic] funds” is demonstrably false since the Defendants utilized the Advisory Client accounts to avoid Brown Trading Account losses. (TT 1455-58, Vol. 7; TT 1490-93, Vol. 8 & Exs. 414, 815 & 817). 66. Furthermore, the Advisers retained the false statement “under no circumstances will the firm place its own interest ahead of our clients, nor will the firm take a position which could be detrimental to our clients [sic] position.” (Ex. 17 at KWB 00273, Ex. 23 at KWB 00360 & Ex. 414, last page). 67. Both the original and the revised disclosure misrepresented the nature and extent of the conflicts of interest created by the Brown Trading Account. Incredibly, at trial, Desiderio admitted that in March 2005, 21st Century had changed the entire disclosure back to the original disclosure the Commission’s examination staff cited in the Deficiency Letter as “inadequate and misleading.” (TT 435-41, Vol. 3 & Exs. 21A, 23). 68. Despite the Advisers’ claims “under no circumstances will the firm place its own interest ahead of our clients, nor will the firm take a position which could be detrimental to our clients [sic] position,” the documents and a simple comparison of the vast disparity in performance between the Brown Trading Account and Cimilluca Accounts and the Advisers’ clients accounts when they received allocations from the Bunched Trade Account paints an entirely different picture. (TT 1452-61, Vol. 7 & Exs. 811 & 815-17). The Brown Entities Financial Problems 69. The broker-dealer only generates revenue from transaction-based commissions. (TT 1093-94, Vol. 6). For Brown Investments, this transaction-based model is only marginally profitable. (TT 1094, L. 13-17, Vol. 6). In fact, the audited financial report for the broker-dealer’s 2001 fiscal year ending March 31, 2002, showed the broker-dealer lost money that year. (TT 1141-42, Vol. 6 & Ex. 302). 70. The Advisers only source of revenue is management fees based on a percentage of assets under management. (TT 1092-93, Vol. 6 & Exs. 21A at 2A & Ex. 22 at 2a). From at least July 2002 through approximately April 2004, 21st Century did not charge management fees. (TT 1102, Vol. 6). 71. On August 1, 2002, about the same time 21st Century stopped charging management fees, the Browns registered Brown & Company with the Commission as an investment adviser. (TT 911-12, Vol. 5 & Ex. 422). 72. 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). As of its initial filing, however, Brown & Company had no assets under management and relied on its affiliation with 21st Century to qualify for Commission registration without the $25 million minimum asset requirement. (TT 443-444, Vol. 3). 73. Accordingly, the primary, if not exclusive, source of revenue for all Brown Entities as of July 2002 was the broker-dealer operation which had actually lost money the prior fiscal year. (TT 911-12, Vol. 5; TT 1092-93 & 1141-42, Vol. 6 & Exs. 302 & 422). 74. Shortly thereafter, on September 10, 2002, Cimilluca began trading the Brown Trading Account. (TT 1219, L. 21-23, Vol. 6). 75. After just six months of Cimilluca’s trading activity, the 2002 year-end audited financials show gross income of $376,000 even though the broker-dealer operations were, at best, marginally profitable. (TT 1142-43, Vol. 6). Cherry Picking is Illegal and Violates Fiduciary Duties 76. Both Ken Brown and Cimilluca admitted during trial that cherry picking is improper and illegal. (TT 566-68, Vol. 3; TT 1208, Vol. 6 & Ex. 853). They also admitted that following Ameritrade’s rules is not a defense to cherry picking. (TT 574-75, Vol. 3 & TT 1213, Vol. 6). Moreover, cherry picking violates National Association of Securities Dealers (“NASD”) rules as well. (TT 1577-79, Vol. 8). 77. Cimilluca also testified that he knows he cannot participate or provide substantial assistance to a fraud on Ken Brown’s customers. (TT 727, Vol. 4). 78. There-is no genuine dispute that the Advisers, their employees and supervised personnel owed fiduciary duties to the Advisers’ clients. For example, Ken Brown agreed that: 3 Q And do you agree that a registered investment advisor, 4 in order to fulfill its fiduciary duties to its clients, an 5 investment advisor should make full and fair disclosure of 6 all material facts necessary for informed decision-making by 7 clients, particularly where a — particularly where a 8 possible conflict of interest is involved, irrespective of 9 whether such disclosure is called for by a specific item in 10 Form ADV? Do you agree with that statement? 11 A Yes. (TT 1118, L. 3-11, Vol. 6. See also TT 1207-08, Vol. 6; TT 1692-93, Vol. 8 & Ex. 853). 79. Ken Brown also admits that his discretionary authority is restricted by his fiduciary obligations to his clients. (TT 965-66, Vol. 5). For instance, Ken Brown admitted that he owed investors a duty to always place their best interests before his interests. (TT 1121, Vol. 6. See also TT 1249-50, Vol. 6 & Ex. 21A). Cherry Picking Scheme Flourished in Lax Internal Control Environment 80. There are heightened conflicts of interest anytime a broker dealer and investment adviser are under common control, even more so when a proprietary account is involved. (TT 1555-56 & 1560, Vol. 8). Hence, this should have been an area with a high amount of internal controls and written documentation of those internal controls and documentation that those internal controls are being followed. (TT 1560-61, Vol. 8). 81. However, the complete opposite occurred, since, among other reasons, Defendants used order tickets that did not include the ultimate client’s name or account number on it at the time of trade (TT 1559-60, Vol. 8); allowed gaps in internal controls by not having anyone sign-off on allocation or correction sheets (TT 735, Vol. 4 & TT 1562, Vol. 8); and utilized order tickets that do not show which accounts) ultimately received securities purchased through the Bunched Trade account. (TT 546-47, Vol. 3; TT 734-35, Vol. 4 & Ex. 153A). 82. Moreover, in violation of the Advisers Act, Defendants commingled and faded to segregate the firms’ securities from investors’ securities, by placing securities that went to the firm’s proprietary account and clients in the 180 Account and the Bunched Trade Account. (TT 1598, Vol. 8). In fact, when questioned at trial Ken Brown could not think of any good reason to use the Bunched Trade Account. (TT 1324-25, Vol. 7). 83. In reality, Defendants used the Bunched Trade Account because it was the mechanism by which they could carry out their cherry picking scheme. Ken Brown also did not purchase a computer program, Moxy, for just $15k plus an annual fee (TT 293, Vol. 2) that would have likely stopped the fraud, since Moxy predetermines allocation (TT 292-93, Vol. 2) and ensures average pricing (TT 295, Vol. 2). Same Day Overlap 84. The SEC’s examination staff identified that both the 180 Account and Adviser’s clients were purchasing or selling the same securities on the same trading day and the clients were consistently receiving the worse execution price. (Ex. 21A). The amount of overlap the SEC’s examination found was much greater than what they expected to find and it was egregious that the clients were repeatedly receiving the worse execution price. (TT 137-38 & 140, Vol. 1). 85. During May 2004, Cimilluca testified that there was no policy in place regarding same day trading. (TT 736-37, Vol. 4). However, during December 2005, he changed his testimony and testified instead that he made-up a policy to place all trades in the Bunched Trade Account (both client and 180 Account trades) and not allocate shares that went to the 180 Account until after he had already sold the securities in the 180 Account. (TT 737-39, Vol. 4). Cimilluca admitted that the effect of his made-up policy was that it allowed him to not allocate shares to the 180 Account until after he had profitably day traded the shares. (TT 740-41, Vol. 4). In addition, Cimilluca’s made-up policy usually did not have the effect of giving clients the same average price as the 180 Account received. (TT 816-17, Vol. 4). Cimilluca first denied that he used this same policy for his own account, but later admitted that he did. (TT 741-44, Vol. 4). Cimilluca’s made-up policy is not written down anywhere and he did not tell Mr. Wasserman about it. (TT 745^16 & 814-17, Vol. 4). 86. Cimilluca testified inconsistently about whether he and Ken Brown noticed the same day overlap. During his May 2004 testimony, Defendant Cimilluca testified that both he and Ken Brown noticed the same day overlap. (TT 661-63 & 666-667, Vol. 4). However, during his December 2005 deposition, Defendant Cimilluca testified that neither he nor Ken Brown noticed the same day overlap. (TT 663-63 & 667, Vol. 4). 87. In the June 10, 2003 Deficiency letter, the SEC’s examination staff provided Ken Brown with written notice of multiple, specific deficiencies and/or violations of law, among them: • The Advisers failed to detect improper trading activities in related accounts, specifically the Brown Trading Account • The Advisers lacked adequate specific personal trading procedures and did not have any controls in place to prevent improper personal trading. • Defendant Cimilluca had a personal financial interest in the Brown Trading Account. • The improper trading and lack of written personal trading procedures identified by the examination staff may violate Section 206 of the Advisers Act which establishes a statutory fiduciary duty for investment advisers, including an affirmative duty of utmost good faith- to act solely in the best interest of the client, and to make full and fair disclosure of all material facts. • The Advisers’ Forms ADV failed to make complete and accurate disclosure of conflicts as required by Item 9 of Form ADV Part II concerning “Participation or Interest in Client Transactions.” • The Forms ADV failed to disclose that (1) related accounts will trade on the same day as clients and receive better prices than clients and (2) that the Advisers’ related accounts and their trader had a financial interest and would profit, at the possible expense of clients, when executing client trades. • The Advisers lacked “basic internal controls” and had problems maintaining current and accurate client account information such as a client list for each Adviser along with the assets per client and each Adviser’s total assets. • The Advisers provided inaccurate and untimely trade blotter reports and it appeared that an employee was changing trading information, without any oversight, in order to reconcile month end client statements. • Abnormally high number of error trades — specifically, 92 error trades between October 26, 2002 and February 28, 2003 — and improperly maintained and/or unspecific records regarding the error transactions. (Ex. 21A). Defendants Used the Allocation and Correction Sheets to Cherry Pick 88.Cimilluca’s handwriting is on the allocation and correction sheets. (TT 579, 593 & 610, Vol. 3). In addition, there is no valid proof that the shares that went to the 180 Account from the Bunched Trade Account were always intended for the 180 Account. (TT 575-76, Vol. 3). There was no one in the trading room besides Cimil-luca and sometimes his Dad. (TT 576, Vol. 3 & TT 688-89, Vol. 4). Trades were repeatedly placed in the Bunched Trade Account, and then all of those shares were allocated to the 180 Account or the Cimil-lucas’ joint account. (TT 609-11, Vol. 5 & Exs. 235-37). 89. During the SEC’s examination, Cimilluca lied to the SEC staff by falsely claiming that he sent allocation sheets for trades placed in the Bunched Trade Account within one hour of entry. (TT 114-16 & 185, Vol. 1). In addition, it was not until December 2005, that the first substantive disclosure was made by Cimilluca that he was using the Bunched Trade Account to process 180 Account trades. (TT 657, Vol. 4). During his December 2005 deposition, Cimilluca falsely claimed that he sent up the allocation sheet to Ameri-trade the “second” he finished a trade. (TT 657-59, Vol. 4). However, during his April 16, 2007 deposition, Defendant Cimil-luca changed his testimony and testified that he “had no idea” when his allocation sheets actually were faxed to Ameritrade. (TT 660-61, Vol. 4). 90. For just the first nine months of Cimilluca’s trading (September 2002 through May 2003) there were 139 corrections. (TT 1429, Vol. 7). This is a very significant number and all corrections were favorable to the 180 Account or Related Accounts. (TT 1431, Vol. 7). Corrections were not due to transposition issues, since 180 and 539 accounts are completely different strings of numbers. (TT 1431-32, Vol. 7). All the correction sheets faxed to Ameritrade were to eor-rect errors that Cimilluca had allegedly made. (TT 710 & 732-34, Vol. 4). 91.The SEC illustrated during questioning of the Defendants’ expert witness how through the use of correction sheets Defendants would cherry pick the lower priced block of securities for themselves while investors were harmed by receiving allocations of the higher priced blocks. A few examples, (Plaintiffs Exhibit No. 552 entered into evidence.) 15 BY MR. MARTIN: 16 Q And 552, my understanding is that the 180 account 17 purchased shares on 12/13/02 of Electronic Arts, or ERTS? 18 A Correct. 19 Q And from that transaction, it made a total of $45.31? 20 A Yes. 21 Q And the clients also got — purchased or had for them 22 purchased securities of ERTS on that same day; is that your 23 understanding? 24 A That’s correct. 25 Q And those were sold the next 19 days, or so? Nineteen, 1742 1 20 days, for a loss of $77,000? 2 A Approximately, yes. 3 Q Approximately? 4 A Yes. 5 Q And that was a realized loss, correct? 6 A That’s absolutely a realized loss. 7 Q And did you ever look at the mechanics of this 8 transaction? 9 A I don’t know what you mean by mechanics. 10 Q Well, why don’t we pull out, if you would, Plaintiffs 11 exhibit 803, which are the schedules by Mr. Collier. If you 12 would refer to the 12/13/02 transaction, ERTS. 8 Q And then it shows that that lowest purchase price at 9 3:53 the fax was received was corrected to the 180 account. 10 Do you see that? 11 A I see a correction to the 180 of, yeah, lower one. 12 Q The lowest one of the three, right? 13 A Right, 57.09 and change. 14 Q So the correction had the effect, based on the schedule, 15 of taking the lowest of those three purchases and putting 16 them in the 180 account. You agree with me based on the 17 schedules? 18 A The correction certainly moved that trade to the 180 19 account. 20 Q And then at 3:37 p.m., and a fax that was received at 21 4:16 p.m., the remaining shares went over to more than 20 22 individual accounts. Do you see that? 23 A Ido. 24 Q And if you scroll across on Mr. Collier’s analysis, it 25 shows that the one-day Electronic Arts transaction was down 1744 1 $16,000 and change from the purchase price — for the shares 2 the clients got? 3 A In the aggregate. 4 Q In the aggregate. 5 So that was the unrealized loss at the end of day 6 one? 7 A That’s correct. 8 Q And exhibit 552 shows that the actual realized loss in 9 that transaction was much greater than that, right? 10 A It was 77,000, yes. 11 Q And all that allowed the 180 account to make $45, right? 12 A I see that the 180 account only made $45.31 on the 13 trade. 14 Q On a transaction that at the end of the day cost clients 15 $77,000, you agree with that? 16 A Well, there are two separate transactions. The firm 17 transaction made 45, but as you’ve pointed out, the clients 18 that got that same stock on the same day eventually lost 19 77,000. 20 Q And the clients got the two higher buy prices and the 21 180 account got the low buy price, correct? 22 A That’s correct. (TT 1741-44, Vol. 9, emphasis added. See also TT 1745-50, Vol. 9 & Exs. 803 & 992-94). 92. Not only did Defendants use corrections to move the lowest price blocks of shares to the 180 Account (TT 1541-42, Vol. 8 & Ex. 803), they used corrections (and allocations) to minimize losses. (TT 1540-41, Vol. 8). Cimilluca Had Little to No experience in Day Trading which is a Very Risky and Speculative Activity 93. Cimilluca had virtually no experience in day trading before Ken Brown hired him. In fact, he had no day trading experience with real money before being hired by Ken Brown, never traded a day trading account before, and did very little trading while at Noble. In addition, he had almost no training as he had never took any courses in day trading and did not use any proprietary software telling him what to day trade (TT 611-15, Vol. 3). Moreover, his personal trading before coming to KW Brown was unsuccessful. He only made around $3,000 a month at his previous employer. (TT 614-121, Vol. 3 & Ex. 351). Furthermore, for shares Cimilluca holds overnight, he admits that he is a horrendous trader. (TT 638-39, Vol. 3). 94. Day trading is very risky due to time limitations, if the market move is unfavorable, you only have a limited amount of time to recover (at most a day). (TT 1154, Vol. 6; TT 1572-73, Vol. 8; TT 693, Vol. 4; TT 1149, Vol. 6; TT 1570-72, Vol. 8; & TT 1733-34, Vol. 9). 95. Cimilluca’s results were extraordinarily consistent during the entire 46 months at issue (Sept. 2002 through June 2006), since during this time frame the 180 Account only had four down months. (TT 634-35, Vol. 3 & Ex. 202A). In fact, between April 2003 and December 2004, he did not have a single down month. (Id). Moreover, the only down month Cimilluca had between September 2002 and December 2004 (over a two year period), was the month the SEC staff conducted its exam (March 2003). (TT 670-71, Vol. 4 & Ex. 202A). During the entire time period, Cimilluca was the only person who traded the 180 Account. (TT 708, Vol. 4). 96. During September 2002, Cimilluca became employed by Brown & Company, which is dually registered as both an investment adviser and broker dealer. (TT 686 & 707-08, Vol. 4 & Ex. 7). Cimilluca is listed on the organizational charts as being in charge of trading and operations for the investment advisory 21st Century and being in charge of the trade desk for the investment advisory KW Brown. (TT 99-101, Vol. 1 & Ex. 620). Nonetheless, during May 2004, Cimilluca testified that he had no idea what policies or procedures were in place for the Advisers, that no one spoke to him and he was not aware of any policies or procedures in place regarding same day trading, and that he had no discussions with Ken Brown about the SEC’s examination or any new policies that were to take place after the exam. (TT 684-87, Vol. 4. See also TT 731-32, Vol. 4). In addition, Cimilluca did nothing in response to the SEC’s Deficiency Letter. (TT 699-700, Vol. 4 & Ex. 21A). 97. A few days before he hired Cimillu-ca, Ken Brown reviewed a regulatory filing from Cimilluca’s previous employer that explained Cimilluca’s departure in the following manner: (TT 394-98, Vol. 2; TT 1218-22, Vol. 6 & Exs. 242, 368, 882). Errors were discovered in a trading profit and loss system. Upon correction, adjusted numbers decreased the overall profits of the department, rendering the division no longer viable. Michael Cimilluca was responsible for maintaining the accuracy of this information. (See also TT 674, Vol. 4 & Ex. 2). 98. In response to the SEC’s questioning, Cimilluca claimed that he did not recall the substance of any conversation he had with Ken or Wendy Brown about this matter and he did not have an understanding why this language is in his CRD. (TT 692-93 & 812-13, Vol. 4). 99. Cimilluca created a document, Exhibit 19, which he claimed reflected all trades held overnight in the 180 Account from December 2002 to October 2004. This document is materially false in that numerous trades held overnight during the subject time period are omitted. (TT 767-68 & 810, Vol. 4 & Def. Ex. 19). 100. Advent is a portfolio management system used by Defendants and was accurate in calculating the performance of accounts. (TT 469-72, Vol. 3 & Ex. 126). Defendants’ own document produced from Advent showed that the 180 Account went up by hundreds of percent a year. (TT 472-74, Vol. 3 & TT 1481, Vol. 8 & Exs. 115 & 812). 101. In stark contrast, Defendants’ expert witness, who has been involved in the securities industry for more than 40 years, traded in the pits for the Chicago Mercantile Exchange, and day trades his personal account, only makes about 14% to 15% a year from day trading. (TT 1728, Vol. 9). In addition, he has never seen a situation where over a number of years every day trade is profitable. (TT 1728-29, Vol. 9). 102. At his previous employer, Cimillu-ca received a salary of $27,000 a year plus 15% of the trading profits after deducting expenses. (TT 395, Vol. 2 & Ex. 882). In his four months trading the Brown Trading Account, Cimilluca received more than $108,000 from Brown & Company. (TT 619, L. 14-21, Vol. 3; TT 1140 & 1224, Vol. 6 & Ex. 117). 103. In 2003, his first full year trading the Brown Trading Account, Brown & Company paid Cimilluca more than $765,000 from the profits he generated for the Brown Trading Account. (TT 619-21, Vol. 3; TT 1224, Vol. 6 & Exs. 118 & 503). In early 2004, he used part of those funds to buy the house in Parkland, Florida where he currently resides. (TT 565-566, Vol. 3 & Ex. 206). Investors Suffered Actual Damages/Losses from. Defendants’ Scheme 104. During the time period that the Defendants were conducting their fraudulent cherry picking scheme, the Advisers lost hundreds of accounts, millions of dollars worth of assets under management, and overall their clients performed very badly. (TT 451-55, Vol. 3 & TT 1149-51, Vol. 6 & Ex. 470). Brown admits that he does not get favorable letters from investors anymore. (TT 1365-66, Vol. 7). Ken Brown’s growth, small-cap tech stock focus has not fared well. (TT 124-26, Vol. 1; TT 338-40, Vol. 2 & TT 1149, Vol. 6 & Exs. 612 & 617). He has received customer complaints about overly aggressive trading and losing on stocks that Ken Brown bought for them. (TT 1176-79 & 1185-86, Vol. 6 & Ex. 133). 105. Defendants withheld accounts from the SEC. Even though Defendants claimed that they had produced the performance of all advisory clients for the three year period, they did not include accounts that left during those three years. They did not include accounts such as Judge Stone’s that received heavy allocations from the Bunched Trade Account, and more than 1,700 accounts that were still under management with the Defendants. (TT 484-90, Vol. 3 & Exs. 470, 501 & 817). The “cherry-picked” list of accounts that the Defendants did produce to the SEC, still showed that overall their clients preformed very badly. For example, at least 175 clients’ accounts (of which at least 78 were IRA accounts) lost money over a three-year period (September 1, 2002 through September 1, 2005) when all the market indexes went-up. (TT 474-84, Vol. 3, TT 1189-94 & 1196-99, Vol. 6 & Ex. 501). 106. Ken Brown testified that Judge Stone would call in and ask that his account be traded. (TT 962-63, Vol. 5). Judge Stone, however, directly contradicted Ken Brown’s sworn testimony, and stated he never got involved with trading decisions, but instead left the decision-making up to Brown. (Ex. 715 at 5-6). 107. Moreover, Judge Stone testified about seven stock transactions where he suffered both unrealized and realized losses. (Ex. 715 at 1-5). Defendants Falsely Testified 108. Cimilluca admitted at trial that during October 2002 he became the registered representative for Kenneth (Robert) Morency’s account, that he made purchase and sale decisions for his account, and entered into a kickback scheme with Mr. Morency where he would pay Cimilluca 9% of his the profits in cash. (TT 547 & 549-50, Vol. 3 & Ex. 250). During the time this kickback arrangement was in place (October 2002 through March 2005), Mr. Morency’s account went up by more than $150,000 (from $50,000 to more than $200,000) and every trade (all were day trades) Cimilluca placed in Mr. Morency’s account were profitable. (TT 550-51, 560-61, Vol. 3; TT 980-82 & 1021-22, Vol. 5 & Exs. 205, 217-18 & 251). Defendant Cim-illuca also admitted that by no later than February 2004 he was the registered representative for both Tracy Valentine and Dante Grassi, and made purchase and sale decisions on their behalf. (TT 548, Vol. 3 & Exs. 276 & 294). In addition, Cimilluca also traded for the accounts of Linda Co-lumbo, two individuals named Leonard Scarnato (his father-in-law and brother-in-law), and Eleanor Pepio (TT 667-670, Vol. 4). All of the individuals Cimilluca traded for were friends from his baseball team, his wife’s relatives, or business associates of his father-in-law. (TT 670, Vol. 4). 109. Prior to the trial, Cimilluca testified falsely about nearly all the above stated matters. At trial, Cimilluca admitted that he repeatedly perjured himself during sworn testimony that he gave to the SEC during its investigation and deposition testimony taken in this matter. (TT 551-63, 568-74, 577-80 & 584-605, 607-608, 613-14, Vol. 3 & Exs. 161, 205-06, 209-11, 213-14 & 217-32, 234-35). He admitted that over nearly a three year period he gave false testimony to the SEC during three separate sworn testimonies — May 24, 2004, April 16, 2007 and April 17, 2007. (Id.) Overall, during these three testimonies he gave inaccurate testimony to at least forty-four (44) of the SEC’s questions. (Id.) A few examples from Cimilluca’s trial testimony, Q. So, now, turning to your April 16th, 2007, testimony in 9 this matter before the Government, if you would turn to 10 page 23 of that transcript, line 11 through 16. Am I reading 11 this question correctly? 12 Are there other accounts at K.W. Brown besides your 13 own personal accounts that you can trade directly, besides 14 your own personal accounts and the Brown trading accounts? 15 Answer: No. 16 Did I read that correctly? 17 A Yes. 18 Q And that wasn’t true, was it? 19 A No. 20 Q And when we brought up Mr. Morency, you couldn’t recall 21 if you were an account