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txt

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934

Rel. No. 41126 / March 1, 1999

Admin. Proc. File No. 3-9355

___________________________________________________

In the Matter of :

TED HAROLD WESTERFIELD :

___________________________________________________:

OPINION OF THE COMMISSION

BROKER-DEALER PROCEEDING

Grounds for Remedial Action

Conviction

Injunction

Practice and Procedure

Collateral Bar

Permanent Bar

Associated person of a registered broker-dealer was

convicted of and enjoined from violations arising from a

kickback scheme with an investment adviser. Held, it is in

the public interest to bar respondent from association with

a broker, dealer, municipal securities dealer, investment

adviser, investment company, or a member of a national

securities exchange or of a registered securities

association.

APPEARANCES:

Ted Harold Westerfield, pro se.

Stephen J. Crimmins, for the Commission's Division of

Enforcement.

Appeal filed: March 6, 1998

Last brief received: June 25, 1998

I.

In this administrative proceeding, we consider what sanction

should be imposed in the public interest on Ted Harold

Westerfield in the aftermath of a criminal conviction and

injunction arising from his participation in a fraudulent scheme.

The Division of Enforcement ("Division") appeals from the

decision of an administrative law judge. [1] The law judge

determined that Westerfield, a former associated person of a

broker-dealer, should be barred from association with any broker

or dealer, with a right to reapply after five years. The

Division, in its appeal, challenges the law judge's failure to

impose a collateral, or industry-wide, bar, and his failure to

impose a permanent bar. We base our findings on an independent

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review of the record, except with respect to those findings not

challenged on appeal.

II.

A. Westerfield was found guilty by a jury on March 14,

1996, of violating Section 10(b) of the Securities Exchange Act

of 1934 [2] and Exchange Act Rule 10b-5; [3] of aiding, abetting,

and causing a violation of Section 206 of the Investment Advisers

Act of 1940; [4] of conspiring to engage in fraudulent and

deceptive business practices in violation of 18 U.S.C. § 371; and

of committing mail fraud in violation of 18 U.S.C. § 1341.

Westerfield was sentenced to fifteen months in prison, fined

$1,050, and ordered to pay restitution in the amount of

$105,465.50. [5]

In convicting Westerfield, the jury necessarily found the

following allegations from the indictment to be true. [6] From

approximately April 1990 through approximately April 1991,

Westerfield was employed as an account executive with Gruntal &

Co., a securities brokerage firm located in New York City.

Westerfield's responsibilities at Gruntal included executing

orders for the purchase and sale of high-yield bonds on behalf of

Gruntal customers.

G. Albert Griggs, Jr., a friend of Westerfield's, was

employed as a bond analyst and assistant portfolio manager in

Massachusetts by Keystone Custodian Funds, Inc., an investment

adviser to the Keystone mutual funds, managed by Keystone Group,

Inc. (collectively, "Keystone"). In that position, Griggs'

principal responsibility was to analyze high-yield bonds and to

identify profitable investment opportunities for the Keystone

mutual funds. As part of his duties, Griggs recommended that the

Keystone mutual funds purchase and sell particular high-yield

bonds at specified prices.

As an associated person of an investment adviser, Griggs

owed a fiduciary duty to Keystone and its shareholders. [7] Both

Westerfield and Griggs understood that Griggs was prohibited from

accepting compensation from persons other than Keystone in

connection with any securities transaction that he recommended to

the Keystone mutual funds. Griggs further was obligated to

represent the best interests of the Keystone mutual funds in the

purchase and sale of the bonds.

In April 1990, Westerfield and Griggs entered into a secret

kickback scheme that lasted through November 1990. As agreed,

Griggs placed orders for Keystone's purchases and sales of high-

yield bonds with Westerfield, who then executed those

transactions through Gruntal. In each transaction, Westerfield

obtained a brokerage commission from Gruntal, the size of which

depended on Gruntal's profit from that transaction. As part of

their agreement, Westerfield retained all commissions he earned

on transactions referred by Griggs up to an amount equal to

Griggs' gross annual compensation from Keystone. Westerfield and

Griggs shared equally all commissions above that amount.

Westerfield and Griggs concealed this kickback arrangement from

Gruntal and Keystone.

In steering Keystone brokerage business to Westerfield,

Griggs failed to negotiate to obtain for Keystone the best

possible prices from Gruntal or through firms other than Gruntal.

Instead, Griggs recommended that Keystone purchase high-yield

bonds from Gruntal and sell high-yield bonds to Gruntal in order

to maximize Westerfield's commissions and, in turn, the amount of

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Griggs' kickbacks. Westerfield knew that his arrangement to

split portions of his commissions with Griggs compromised Griggs'

decision-making on behalf of Keystone.

During 1990, Griggs caused Keystone to purchase from

Westerfield and Gruntal approximately $15,850,000 par value of

various high-yield bonds, at an aggregate price of approximately

$8,157,750, and to sell to Westerfield and Gruntal approximately

$16,250,000 par value of various high-yield bonds, at an

aggregate price of approximately $6,000,000. The scheme netted

Westerfield $209,687.50 in commissions from Gruntal -- nearly all

of the compensation Westerfield earned from Gruntal in 1990.

From these commissions, Westerfield kicked back to Griggs an

aggregate of approximately $35,000 in cash.

B. On June 3, 1997, the United States District Court for

the Southern District of New York entered a final judgment

permanently enjoining Westerfield from violating Section 10(b) of

the Exchange Act and Exchange Act Rule 10b-5, from violating, or

aiding, abetting, counseling, commanding, inducing, or procuring

violations of Section 204 of the Advisers Act [8] and Advisers

Act Rule 204-1(b), [9] and from violating or conspiring to

violate Section 17(e)(1) of the Investment Company Act of

1940. [10] As discussed below, the court based its decision on

the doctrine of collateral estoppel resulting from the criminal

case, and on the likelihood of future violations by Westerfield.

The court ordered Westerfield to disgorge $210,931, together with

prejudgment interest in the amount of $133,896, for a total of

$344,827. The court provided that Westerfield could offset

against this amount any amounts that he paid in satisfaction of

the restitution ordered in the criminal case against him.

C. In this proceeding, the administrative law judge

imposed on Westerfield a bar from associating with any broker or

dealer, with a right to reapply in five years. The law judge

declined to impose a collateral bar. He noted that the

sentencing judge in the criminal case imposed on Westerfield a

sentence at the low end of the sentencing guidelines range for

Westerfield's convictions. The sentencing judge, according to

the sentencing hearing transcript, stated:

I don't usually say very much at all in sentencings, but it

strikes me that Mr. Westerfield is a very talented person,

willing to work very hard, and I hope [with] this experience

behind him he will go on to do the things he is capable of.

The law judge concluded that Westerfield was unlikely to

commit future violations due to the criminal and civil sanctions

already imposed upon him. The law judge also expressed the view

that it would be difficult for any convicted felon to obtain

employment as a securities professional.

III.

A. Under Exchange Act Sections 15(b)(6) [11] and

15(b)(4)(B), [12] we have the authority to institute

administrative proceedings against any person convicted of

certain enumerated crimes. These enumerated crimes include,

among other things, committing within ten years a violation of 18

U.S.C. § 1341 or a felony involving the purchase or sale of a

security or arising out of the conduct of the business of a

securities professional. [13] Under Section 15(b)(4)(C) of the

Exchange Act, [14] our proceedings also may be based on an

injunction from engaging in or continuing any conduct or practice

in connection with being a broker or dealer or from any activity

in connection with the purchase or sale of a security. If we

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find that the person has been the subject of any of these

actions, we consider whether it is in the public interest to

impose sanctions on that person. Westerfield does not dispute

that the violations leading to his conviction and injunction are

included in the Exchange Act sections cited above.

B. In determining whether a sanction is in the public

interest and, if so, the appropriate sanction, we examine the

following factors:

[T]he egregiousness of the [respondent's] actions, the

isolated or recurrent nature of the infraction, the degree

of scienter involved, the sincerity of the [respondent's]

assurances against future violations, the [respondent's]

recognition of the wrongful nature of his conduct, and the

likelihood that the [respondent's] occupation will present

opportunities for future violations. [15]

Westerfield's conduct was egregious. Westerfield engaged

with Griggs in a scheme to pay and receive kickbacks in disregard

of Griggs' fiduciary duty to his customers. Westerfield and

Griggs concealed the scheme from their respective employers.

Griggs channeled trades through Westerfield in exchange for

secret payments on a prearranged schedule. Westerfield made more

than $200,000 in commissions from this scheme and kicked back to

Griggs $35,000. [16] Westerfield's commissions from his

arrangement with Griggs constituted nearly all his income for

that year. Westerfield's conduct demonstrates a high degree of

scienter, including planning, executing, and concealing the

fraudulent scheme.

We disagree with Westerfield's assertion that, because he

had committed no prior disciplinary infraction, his illegal

conduct was isolated. [17] The record reflects that, pursuant to

the scheme, he and Griggs effected numerous violative

transactions over seven months. [18] The transactions were large

and involved several accounts.

Another factor in our determination of the appropriate

sanctions is the sincerity of Westerfield's assurances against

future violations. [19] In the criminal case, the judge

sentenced Westerfield at the low end of the guideline range and

offered praise for his perceptions of Westerfield's talent and

work ethic. The sentencing judge, however, did not comment on

whether Westerfield has made assurances against future

violations. When given an opportunity to speak to the sentencing

court, Westerfield offered a claim of mental illness as a

mitigating factor in his violation but did not address the

subject of future violations. We note, however, that the United

States District Court that enjoined Westerfield cited

Westerfield's "refusal to recognize any wrongdoing" as a basis

for stating:

In this case, the systematic nature of Westerfield's

violations together with his denial of liability create a

reasonable likelihood that Westerfield's violations might

continue in the future absent an injunction. [20]

Similarly, the law judge concluded that Westerfield "made no

assurances against future violations" and "discounts the wrongful

nature of his fraudulent conduct and sees himself as a victim of

the legal system."

In his brief to the Commission, Westerfield now states, "You

can rest assured that Respondent will never knowingly do anything

that would even be considered questionable in the future."

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Westerfield, however, downplays the wrongfulness of the conduct

described in this opinion and emphasizes his frustration with the

legal process. [21] He claims that the evidence against him was

insufficient and was unfairly based primarily on Griggs'

testimony. He alleges that unfair leniency was granted to

Griggs, claims that his own attorney in the criminal trial was

incompetent, and complains that the jury that found him guilty

did not include members of the financial community. [22]

Westerfield also exhibits little understanding of the extent

of his obligations under the securities laws. For instance, in

his brief to the Commission, Westerfield argues that, because he

could have participated in an even more harmful scheme, his

violation was not a case of "truly egregious" behavior. He,

moreover, insists that $35,000 in kickbacks is not "a substantial

sum." He also claims that the $210,000 that he derived from the

scheme was "minuscule" by Wall Street standards. While

Westerfield contends that the trades were appropriate for Gruntal

and Keystone, [23] whether or not the trades were suitable does

not diminish Westerfield's offense. [24]

The administrative law judge stated that Westerfield

"recognized that his criminal conviction may adversely affect his

future employment opportunities." [25] Westerfield also asserts

that, since he is now a truck driver, his occupation is unlikely

to present opportunities for secret kickback schemes. We

believe, however, that, absent a permanent bar, Westerfield may

try again to become a securities professional. Westerfield has

spent his entire career in the securities industry, and in 1991,

he briefly established his own investment management company.

Mindful of the protection of investors and consistent with

the public interest, [26] we impose on Westerfield a permanent

bar. A permanent bar gives us control over the timing and

circumstances of any possible future re-entry by Westerfield as a

securities professional, upon analysis of the public interest and

protection of investors at such future time. [27] Given the

nature of Westerfield's conduct, we believe that the bar should

not be time-limited.

IV.

The Commission has determined that, under the "place

limitations" language of Section 15(b)(6), we may impose a

collateral, or industry-wide, bar, when the public interest and

protection of investors so require. [28] The Division asks that

we impose a collateral bar on Westerfield. As we stated in Meyer

Blinder:

In determining whether to impose a collateral bar, we

consider foremost whether the misconduct is of the type

that, by its nature, "flows across" various securities

professions and poses a risk of harm to the investing

public in any such profession. We also consider

whether the egregiousness of the respondent’s

misconduct demonstrates the need for a comprehensive

response in order to protect the public. [29]

As we stated above, Westerfield's conduct was egregious. He

engaged in a scheme with an investment adviser that endured for

an extended period of time and involved numerous transactions.

For the year in question, Westerfield made virtually his entire

living off the scheme.

We further find that Westerfield's conduct clearly satisfies

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the requirement that misconduct flow across the securities

industry. Westerfield's secret kickback scheme with an

associated person of an investment adviser resulted in a

violation of the investment adviser's fiduciary duty to its

investment company customers. Westerfield was convicted under

the Exchange Act and the Advisers Act, and enjoined from

violations of the Exchange Act, the Advisers Act, and the

Investment Company Act. We further are concerned that there are

opportunities to participate in kickback schemes in any capacity

in the securities industry. Westerfield is a threat to the

integrity of any aspect of the securities industry in which he

might be employed. [30]

Consistent with the public interest and protection of

investors, we find that Westerfield's misconduct merits

**FOOTNOTES**

[1]: Ted Harold Westerfield, Initial Decision No. 120

(February 9, 1998), 66 SEC Docket 1616. Westerfield did

not appeal the law judge's decision.

[2]:15 U.S.C. § 78j(b).

[3]:17 C.F.R. § 240.10b-5.

[4]:15 U.S.C. § 80b-6.

[5]:The judgment against Westerfield in the criminal case

was entered on December 31, 1996, United States v.

Westerfield, No. 95 CR 219-001 (S.D.N.Y. Dec. 31, 1996), and

affirmed on June 24, 1997, by the United States Court of

Appeals for the Second Circuit. United States v.

Westerfield, 116 F.3d 466 (2d Cir.) (Table), cert. denied,

118 S.Ct. 352 (1997).

[6]:This statement of facts appeared in our Order

Instituting Proceedings. The law judge found that

Westerfield admitted the validity of the facts alleged in

the order. In his brief to us, Westerfield does not dispute

that the events occurred as alleged. As discussed below,

however, Westerfield continues to challenge the merits of

his conviction.

[7]:It is well settled that an investment adviser is a

fiduciary whose advice must be disinterested. See, e.g.,

SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,

191-192, 201 (1963); Ahmed Mohamed Soliman, Securities

Exchange Act Rel. No. 35609 (Apr. 17, 1995), 59 SEC Docket

356, 362 & n.14.

[8]:15 U.S.C. § 80b-4.

[9]:17 C.F.R. § 275.204-1(b).

[10]:15 U.S.C. § 80a-17(e)(1). SEC v. Westerfield, No. 94

Civ. 6997 (S.D.N.Y. June 3, 1997) (Final Judgment).

[11]:15 U.S.C. § 78o(b)(6).

[12]:15 U.S.C. § 78o(b)(4)(B).

[13]:Id.

[14]:15 U.S.C. § 78o(b)(4)(C).

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[15]:Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979)

(quoting SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir.

1978)), aff'd on other grounds, 450 U.S. 91 (1981). See

also, Meyer Blinder, Exchange Act Rel. No. 39180 (October 1,

1997), 65 SEC Docket 1970, 1972 n.5; Donald T. Sheldon, 51

S.E.C. 59, 86 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).

The United States District Court that enjoined Westerfield

found a reasonable likelihood that Westerfield's violations

would continue absent an injunction, based on the duration

of the scheme and the number of transactions under the

agreement, Westerfield's "refusal to recognize any

wrongdoing," and the "systematic," as opposed to isolated,

nature of the scheme. SEC v. Westerfield, No. 94 Civ. 6997,

slip op. at 8 (May 23, 1997) (Order and Opinion).

[16]:Westerfield paid Griggs through various means,

including traveling from New York to Massachusetts to

deliver cash to Griggs, delivering cash to Griggs during

Griggs' trips to New York, and sending cash to Griggs from

New York to Massachusetts via Federal Express.

[17]:Compare Steadman, 603 F.2d at 1140.

[18]:See Michael T. McAuliffe, 48 S.E.C. 86, 87-88 (1985)

(finding that where bond trader benefitted himself and

others at his employer's expense for twelve months, "this

case does not involve a momentary and isolated lapse, but

the perpetration of a calculated and dishonest scheme over a

lengthy period of time"). See also Donald A. Roche,

Securities Exchange Act Rel. No. 38742 (June 17, 1997),

64 SEC Docket 2042, 2051 (fraudulent price predictions, a

misleading statement concerning a stop/loss order, and

churning over a period of nine months were "not isolated,

but extended over a period of time"); Richard J. Daniello,

50 S.E.C. 42, 46 (1989) (four months of misappropriating

employer's funds was not isolated); Stephen M. Carter,

49 S.E.C. 998, 990 (1988) (ten months of theft, forgery, and

falsification of records was not isolated).

[19]:Compare Steadman, 603 F.2d at 1140.

[20]:SEC v. Westerfield, No. 94 Civ. 6997, slip op. at 8

(Order and Opinion).

[21]:In a February 10, 1997 letter to the United States

District Court Judge, for example, Westerfield refers to the

legal process as "almost five years of legal harassment from

the government."

[22]:To the extent that Westerfield's arguments may be

viewed as a challenge to this conviction, the doctrine of

collateral estoppel set forth in Parklane Hosiery Co., Inc.

v. Shore, 439 U.S. 322, 326 & n.5 (1979), precludes our

consideration of such contentions. Pursuant to that

doctrine, neither a criminal conviction nor material

findings in an injunctive proceeding may be collaterally

attacked in an administrative proceeding. See id.; Elliott

v. SEC, 36 F.3d 86, 87 (11th Cir. 1994); William F. Lincoln,

Securities Exchange Act Rel. No. 39628 (February 9, 1998),

66 SEC Docket 1433, 1436 & n.7; Blinder, 65 SEC Docket at

1973 & n.11.

Westerfield also claims that, because the Division failed to

bring an enforcement action immediately after his violative

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conduct, it cannot now consider him a threat. The bases of

the present proceeding, however, are the criminal conviction

and the entry of the injunction, which occurred in 1996 and

1997, respectively. We note that Commission staff filed the

complaint in the injunctive proceeding on September 26,

1994.

[23]:Westerfield contends, without substantiation, that his

trades contributed to "windfall" profits of $300,000,000, a

return of 41.79% for Griggs' customers in 1991. Therefore,

he argues, his conduct was not egregious because the trades

were profitable. These numbers seem to be based on

Westerfield's own calculations, and contradict charts that

Westerfield supplied to the administrative law judge.

Westerfield has offered no source for the charts or for the

numbers contained within the charts.

In any event, we believe his argument is precluded by the

judgment in the criminal case. The complexity of

determining the exact amount of the loss to Griggs' clients

through the bond trading conducted under the scheme required

the court to estimate the loss. At a minimum, the customers

were charged substantial commissions on these trades. The

judge therefore ordered restitution in the amount of

$105,465.50, which was one-half of the loss estimated to

have occurred from payment of Westerfield's commissions.

The United States Court of Appeals for the Second Circuit

affirmed the methods used by the District Court Judge in

calculating the loss, stating that, due to the conservative

estimate, "any arbitrariness on the court's part would be in

Westerfield's favor." United States v. Westerfield,

No. 96-1747, slip. op. at 4, reported at 116 F.3d at 466.

[24]:See Kevin Eric Shaughnessy, Securities Exchange Act

Rel. No. 40244 (July 22, 1998), 67 SEC Docket 1798, 1805

(upholding sanctions imposed by a self-regulatory

organization because respondent's contentions that trades

pursuant to a kickback scheme were suitable, "even if true,

do not justify a reduction in sanctions"). See also Capital

Gains Research Bureau, 375 U.S. at 195 (holding that injury

is not a prerequisite to enjoining fraudulent or deceitful

practices under the securities laws); SEC v. Blavin, 760

F.2d 706, 711 (6th Cir. 1985) (holding that the Commission

is not required to demonstrate that clients detrimentally

relied on misstatements concerning objectivity of investment

recommendations). Compare United States v. Waymer, 55 F.3d

564, 572 (11th Cir. 1995), cert. denied, 517 U.S. 1119

(1996) (finding that, where breach of fiduciary duty is

alleged, question of undisclosed payments is material

because disclosure may prompt renegotiation of contracts at

a better price).

[25]:Compare Steadman, 603 F.2d at 1140; Archer v. SEC, 133

F.2d 795, 803 (8th Cir.), cert. denied, 319 U.S. 767 (1943);

Hughes v. SEC, 174 F.2d 969, 975-76 (D.C. Cir. 1949).

[26]:See Section 15(b)(6) of the Exchange Act, 15 U.S.C. §

78o(b)(6).

[27]:See Midland Securities Corp., 46 S.E.C. 755, 761 n.34

(1977) (noting that, because this Commission has the

discretion to permit modification of bars or re-entry of

barred persons, "so-called permanent bars are actually bars

of indefinite duration.") (citing Hanly v. SEC, 415 F.2d

589, 598 & n.21 (2d Cir. 1969) and Vanasco v. SEC, 395 F.2d

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349, 353

(2d Cir. 1968)).

[28]:Blinder, 65 SEC Docket at 1974-1975.

[29]:Blinder, 65 SEC Docket at 1981.

[30]:Westerfield protests that imposition of a

collateral bar "would establish a dangerous precedent for

all cases involving institutional brokers" because such

brokers exchange securities across different segments of the

securities industry. Westerfield misconstrues our analysis.

Whether conduct "flows across" deals with whether the

misconduct could be committed in various capacities within

the securities professions. Here, we have concluded that

such opportunities exist.

imposition of a permanent bar from association with a broker,

dealer, municipal securities dealer, investment adviser,

investment company, or a member of a national securities exchange

or of a registered securities association.

An appropriate order will issue. [1]

By the Commission (Chairman LEVITT and Commissioners

JOHNSON, CAREY, and UNGER); Commissioner HUNT concurring in part

and dissenting in part.

Jonathan G. Katz

Secretary

Commissioner HUNT, concurring as to the findings and the

imposition of a permanent broker-dealer bar, but dissenting as to

imposition of a collateral bar for the reasons stated in his

dissent in Meyer Blinder, Securities Exchange Act Rel. No. 39180

(October 1, 1997) 65 SEC Docket 1970, 1982.

**FOOTNOTES**

[31]:We have considered all of the parties' contentions. We

have rejected or sustained them to the extent that they are

inconsistent or in accord with the views expressed herein.

UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Rel. No. 41126 / March 1, 1999

Admin. Proc. File No. 3-9355

___________________________________________________

In the Matter of :

TED HAROLD WESTERFIELD :

___________________________________________________:

ORDER IMPOSING REMEDIAL SANCTION

On the basis of the Commission's opinion issued this day, it

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is

ORDERED that Ted Harold Westerfield be, and he hereby is,

barred from association with a broker, dealer, municipal

securities dealer, investment adviser, investment company, or a

member of a national securities exchange or of a registered

securities association.

By the Commission.

Jonathan G. Katz

Secretary

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