INITIAL DECISION RELEASE NO.140 ADMINISTRATIVE PROCEEDING FILE NO. 3-9218 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ______________________________ : In the Matter of : : INITIAL DECISION TERENCE MICHAEL COXON, : April 1, 1999 ALAN MICHAEL SERGY, : WORLD MONEY MANAGERS, and : WORLD MONEY SECURITIES, INC. : ______________________________ APPEARANCES: John S. Yun, Sheila E. O’Callaghan, and David B. Bayless for the Division of Enforcement, Securities and Exchange Commission John W. Cotton and Jerrold Abeles for the Respondents BEFORE: Brenda P. Murray, Chief Administrative Law Judge On January 13, 1997, the Securities and Exchange Commission ("Commission") named Respondents in a fourteen page Order Instituting Public Administrative and Cease and Desist Proceedings ("OIP") issued pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b)(6) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("ICA"). On March 20, 1997, I granted the Division of Enforcement’s ("Division") request and amended the OIP by adding two paragraphs of factual assertions to Section III of the OIP. The parties filed Pre-Hearing Briefs in April 1997. I held nine days of hearing in San Francisco in May 1997.[1] The Division presented testimony from eleven witnesses, including experts Robert E. Connor, Geoffrey H. Bobroff, G. Stephen Jizmagian, and William J. Michiels, and introduced 119 exhibits. Respondents presented testimony from seven witnesses, including expert Hugh Cadden, and introduced thirty-eight exhibits. The Division filed an initial Post-Hearing Brief, Proposed Findings of Fact and Conclusions of Law, and Appendix of Exhibits on June 24, 1997. Respondents filed their Post-Hearing Brief and Proposed Findings of Fact and Conclusions of Law on July 21, 1997. The Division filed its Post-Hearing Reply Brief on August 4, 1997. I. FACTS This proceeding involves the activities of Terence Coxon and several businesses he initiated and controlled. Mr. Coxon organized World Money Managers ("WMM" or "Adviser"), a California limited partnership, in 1981. (Tr. 2127.) WMM became a registered investment adviser in 1982. WMM is located in Petaluma, California. Mr. Coxon created WMM to organize, promote, and advise the no-load mutual fund he organized in 1982, the Permanent Portfolio Fund, Inc., renamed the Permanent Portfolio Family of Funds, Inc. ("Fund") in 1988. The Fund is registered under the provisions of the ICA and also the Securities Act because it engages in a continuous offering of its own shares. WMM has two general partners and several limited partners.[2] The general partners are Mr. Coxon individually and Terry Coxon, Inc., a California corporation wholly owned by Mr. Coxon, its only employee. (Div. Exs. 22 at 14; 27.) Mr. Coxon’s knowledge is imputed to WMM because he controlled the partnership. SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1089 n.3, 1096 n.16 (2d Cir. 1972) (citing SEC v. North American Research & Dev. Corp., 424 F.2d 63, 79 (2nd Cir. 1970)). Mr. Coxon has been registered individually as an investment adviser since October 20, 1976. In this capacity, he conducts business as Terry Coxon, Inc.[3] (Tr. 934, 2115, 2118, 2124-25.) Mr. Coxon also is/was licensed as a registered representative. Mr. Coxon holds an undergraduate degree in philosophy from Stanford University, and a masters degree in economics from the University of California at Los Angeles. (Tr. 2105-06.) Mr. Coxon is a proponent of the investment philosophy of Harry Browne, a best selling financial author who predicted the devaluation of the U.S. dollar in the 1970s. (Tr. 873-74.) Mr. Coxon was employed as Mr. Browne’s research assistant from 1974 through 1976, and in this capacity assisted Mr. Browne in writing his newsletter, Harry Browne’s Special Reports. Mr. Browne paid him to continue to do so until at least 1990. Because it is impossible to forecast investment returns, Mr. Browne and Mr. Coxon believe that a portfolio consisting of a fixed percentage of certain types of assets is the safest investment model to preserve accumulated wealth or purchasing power in any economic environment. (Tr. 462-63, 1384-85, 1389-90, 1924.) This investment strategy builds on the views of "hard money" or "alternative investors," who choose to invest in precious metals and foreign currencies as a result of their belief that inflation will continue to put stock portfolios at risk. Working together, Mr. Coxon and Mr. Browne developed an investment portfolio that held equal amounts of stocks, gold, long-term government bonds, and Treasury bills and emphasized minimizing taxes. (Tr. 463.) According to Mr. Browne, this "conservative approach" to investing "will never make you rich, but it will do a great deal to preserve and enhance the wealth that you have." (Tr. 1391.) Mr. Coxon modified this approach by adding a small measure of "contrary" alternatives such as 15% of stock warrants to the investment mix advocated by "hard money" investors. (Tr. 2108-10, 2112-13.) This approach was attractive to many people who did not want to spend considerable time on learning the intricacies of investing. It was difficult for individual investors to acquire the diverse components of this portfolio since they were not available from one source. (Tr. 1392-94, 2119-21.) Recognizing a marketing opportunity, Mr. Coxon designed the Fund’s initial portfolio, the Permanent Portfolio, with a fixed asset allocation investment strategy that he developed with Mr. Browne.[4] (Tr. 2122-23.) Asset Target Percentage Asset Target Percentage Gold 20 Stocks of U.S. and foreign real estate - - Silver 5 and natural resource companies 15 Swiss franc assets 10 Specially selected U.S. stock market -- investments 15 Dollars assets 35 (Div. Ex. 19 at 7.) Mr. Coxon worked with John Chandler, the exclusive mail-order distributor of Mr. Browne’s books and owner of his Special Reports, to prepare written materials and to devise a sales strategy that made the Fund an early direct mail marketer of mutual funds. (Tr. 421-22, 1410, 2134-38.) In 1986, WMM contracted with Permanent Portfolio Information ("PP Info."), a WMM limited partner co-owned by Mr. Chandler, to provide administrative and distribution services for the Fund. Specifically, PP Info., located in Austin, Texas, was to perform shareholder services for the Fund and deal with the Fund’s transfer agent. PP Info. was paid a fee of $6,000 a month and reimbursed for all of its operating and administrative expenses. (Tr. 287-88.) Mr. Chandler, president of PP Info., thought of the $6,000 monthly fee as salary for himself and his co-owner Charles Smith. In addition to their salaries from PP Info. in about 1989, Mr. Chandler and Mr. Smith also began receiving monthly compensation of $10,000 directly from WMM. (Tr. 255-56, 288-91.) The ICA "was enacted to protect investors entrusting their savings to others for expert management and diversification of investments which would not be available to them as individuals. The most common type of investment company is the mutual fund." Thomas L. Hazen, The Law of Securities Regulation § 17.1 (2d ed. 1990) (footnotes omitted). Functionally, a mutual fund is "a shell, a pool of assets consisting of securities belonging to the shareholders of the fund." Zell v. InterCapital Income Sec., Inc., 675 F.2d 1041, 1046 (9th Cir. 1982). "[M]anagement of this asset pool is largely in the hands of an investment adviser, an independent entity which generally organizes the fund and provides it with investment advice, management services, and office space and staff." Tannenbaum v. Zeller, 552 F.2d 402, 405 (2nd Cir. 1977). It is customary for investment advisers to have many employees and to provide and pay for the fund’s officers as part of its activities. (Tr. 1078.) The Fund entered into a series of management contracts with WMM beginning in 1982. To a large extent, their subsequent relationship followed the typical investment company paradigm described above. (Tr. 1074-75; Resp. Pre-Hearing Brief at 4, 13.) Neither the Adviser nor the Fund, however, had any salaried officers or employees. In 1990, three people worked for both the Fund and the Adviser in some capacity in Petaluma. Mr. Coxon was Fund president and worked for WMM pursuant to a contract WMM had with Terry Coxon, Inc. Alan Sergy was the Fund’s secretary, treasurer, and chief trader as well as consultant to WMM. Attorney Richard B. Rolnick, was legal counsel to WMM and the Fund. The Fund also had three independent directors until August 1990, when one of them resigned because he was a defendant in a criminal proceeding. (Tr. 2019.) Robert Martin and Mark Tier were/are independent directors who serve on the Fund Board with Mr. Coxon and Mr. Sergy. The independent directors received annual compensation of more than $4,000, and an additional $900 for each Board meeting attended.[5] (Tr. 515-16, 2036-37.) In the period 1986 through 1990, Mr. Coxon spent most of his time working with PP Info. designing direct mail marketing and sales campaigns and new products. (Tr. 2201-02.) There is no evidence that Mr. Coxon or any other WMM employee or consultant spent any time doing research or selecting investments. The nature of the Permanent Portfolio’s holdings were such that it did "very, very little" trading and had very low turnover of assets in the portfolio. (Tr. 659.) Mr. Coxon knew that the design of the Permanent Portfolio was such that it did not need a lot of attention and it was "workable for [him] to run it as a one-man band." (Tr. 2143.) He expected Mr. Sergy to serve as a standby when he was absent. (Tr. 2193.) Mr. Coxon could not remember how much compensation he received in any one year from WMM, but confirmed that Terry Coxon, Inc. paid him $12,000 from the $17,000 a month it charged WMM in 1989. (Tr. 950-51.). The evidence is overwhelming that Mr. Coxon controlled WMM and the Fund, and that he exercised that control. (Tr. 693, 711-12, 750- 51, 763.) Mr. Sergy graduated from Claremont McKenna College in Claremont, California. He was a broker with Sutro & Co., Inc. from 1966 until 1972. In addition to being licensed as a registered representative, Mr. Sergy has been a registered investment adviser since 1972. (Tr. 642.) Mr. Sergy went to Mr. Coxon in 1980 for investment advice after reading about him in Mr. Browne’s books. Mr. Sergy was not employed at the time and because of his personal situation did not want full-time employment. Mr. Sergy began assisting Mr. Coxon with WMM and the Fund in about 1982. WMM began paying Mr. Sergy a consultant’s fee of $2,000 a month in 1984. Mr. Sergy testified that his compensation from WMM increased to $12,000 a month in 1990, but according to Mr. Coxon and Respondents’ counsel, Mr. Sergy received $4,400 a month. (Tr. 868, 2204-05; Resp. Post-Hearing Brief at 40 n.19.) Mr. Sergy did not receive any compensation from the Fund. Mr. Sergy testified he received distributions as a WMM limited partner, but Mr. Coxon testified that WMM did not distribute any partnership profits in the period 1982 through 1997. (Tr. 647-48, 1427.) Mr. Sergy is nominally in charge of the Fund’s day-to-day activities, yet he did not know or could not remember a great deal of basic information. (Tr. 716-17, 721, 727-29, 736-39, 741-42, 753, 842-44.) Mr. Rolnick began working on legal issues for Mr. Coxon in about 1982. In 1988 or 1989, Mr. Rolnick accepted Mr. Coxon’s offer to become legal counsel to WMM and the Fund and moved to Petaluma. (Tr. 2206-08.) Mr. Rolnick maintained a separate legal practice and was legal counsel to the Fund, the Adviser, and other entities Mr. Coxon controlled, until his death in the summer of 1994. Mr. Coxon and Mr. Sergy prepared and/or reviewed all the Fund’s written materials and filings, including the prospectuses and Statements of Additional Information ("SAI"). (Tr. 683-87, 849, 885, 898-901.) Mr. Coxon personally made all final decisions as to what was included in any Fund document. (Tr. 686-87.) The Fund’s prospectuses, dated May 31, 1989 and May 31, 1990, provided that: While the advisory fee is higher than the fees of other mutual funds, World Money Managers absorbs substantially all of the Fund’s ordinary operating expenses, an unusual practice that benefits the Fund by limiting its expenses, simplifying its internal accounting and facilitating independent audits . . . The Investment Adviser pays from its advisory fee at least one-half of all of the Fund’s promotional, distribution and advertising expenses. Such expenses include printing and mailing of prospectuses, brochures and other marketing material, registration and filing fees and related clerical and administrative expense. Each Portfolio of the Fund makes expenditures for promotion, distribution and advertising at an annual rate not to exceed 1/4 of 1% of the first $200 million of the Portfolio’s average daily net assets. A Portfolio makes no such expenditures with respect to its average net assets in excess of $200 million. As a further limitation, a Portfolio’s expenditures for promotion distribution and advertising may not exceed the amounts for promotion distribution and advertising incurred on behalf of the Investment Adviser . . . . The Investment Adviser bears all of the Fund’s ordinary operating expenses (except for the comprehensive advisory fee, the portion of marketing and promotional expenses described above, and the fees and expenses of the Fund’s Independent Directors). Ordinary operating expenses include charges by the Fund’s transfer agent, charges by the Fund’s custodian, accounting fees, auditing and legal fees not associated with registration or litigation, officer’s salaries and expenses, rent and occupancy, printing, postage, and general administrative expense. (Div. Ex. 21 at 12. Div Ex. 19 at 12 contains almost identical language.) Section 12(b) of the ICA requires that any registered open- end company, like the Fund, that acts as a distributor of securities where it is the issuer, must do so through an underwriter or follow the rules and regulations the Commission prescribes as necessary or appropriate in the public interest or for the protection of investors. Pursuant to this statutory authority, the Commission promulgated Rule 12b-1, Distribution of Shares by Registered Open-End Management Investment Company, in 1980. The Commission’s action was based on the theory that permitting mutual funds to finance the distribution of shares could, under certain circumstances, benefit investors. Rule 12b-1 permits a mutual fund to act as a distributor of its own shares pursuant to a written plan that describes all material aspects of the financing of the distribution. The plan must be approved by a majority of the Fund’s shareholders, a majority of the board of directors, and a majority of the disinterested directors. Rule 12b-1 also requires that all agreements with any person relating to implementation of the plan be in writing. The board and the disinterested directors must approve related agreements, and directors must review, at least quarterly, written reports of the amounts spent under the 12b-1 plan and the reasons for these expenditures, i.e. "minutes describing the factors considered and the basis for the decision to use company assets for distribution must be made and preserved." Rule 12b-1(d) of the ICA. See also Bearing of Distribution Expenses by Mutual Funds, 21 SEC Docket 324, 326 (Oct. 28, 1980). The Fund adopted Rule 12b-1 plans in 1982 and in 1986. At a special meeting on January 30, 1986, Fund shareholders approved a change in the advisory contract. The 1986 changes were unusual because they combined in one contract the terms of three separate agreements between WMM and the Fund: the advisory contract, the marketing plan, and the marketing agreement. (Tr. 1083.) This combination type agreement continued into calendar year 1990, the relevant period when the Division challenges Respondents’ actions. In calendar 1990, the relationship between WMM and the Fund was governed by an Investment Advisory and Marketing Contract ("Advisory Contract"), dated March 17, 1988, and renewed March 7, 1990. (Div. Exs. 71, 72.) The Advisory Contract based WMM’s compensation on a sliding scale percentage of the Fund’s total net assets. (Div. Ex. 71 at Part Two.) A workpaper prepared for the Fund Board showed that as of March 8, 1990, the Permanent Portfolio had $98.1 million in assets and a distribution fee of 0.25%. (Div. Ex. 47.) According to Mr. Bobroff, the Division’s expert on the mutual fund industry’s treatment of operating and distribution expenses, the Fund’s charges to investors were in the mid-range of the expense ratio of the companies shown on the workpaper. (Tr. 1154.) The Advisory Contract had two additional significant features that were unusual. First, Part Four contained a marketing plan, adopted in accordance with the provisions of Rule 12b-1, that provided for the Fund to pay the Adviser up to a specified limit for "the promotional, marketing, advertising and other expenses incurred in connection with the public distribution" of Fund shares. (Div. Ex. 71 at Part Four.) Second, Part Three titled "Allocation of Expenses," provided that the Adviser would "pay, cause to be paid or reimburse the Fund for all its ordinary operating expenses during the period of this Contract." (Div. Ex. 71 at Part Three.) Part Three set the Fund’s "expense" payments under the 12b-1 Plan at the lesser of either 0.25% of the first $200 million of each portfolio’s average daily net assets, or, as a separate limitation, 50% of the expenses allocable to each portfolio in that year.[6] (Tr. 1485-86; Div. Exs. 71, 147; Div. Pre-Hearing Brief at 17-18.) This arrangement contained a structural conflict. Mr. Bobroff had never seen a 12b-1 plan with a 50% match or offset provision. In his opinion, the Adviser would have "real problems" meeting its commitment to pay all the Fund’s operating expenses and still meet the 50% match required for reimbursement of "distributional" expenses under the 12b-1 plan. (Tr. 1156-59, 1179-80.) The Fund eliminated the matching provision after March 17, 1991, and it eliminated its 12b-1 plan in 1994. (Resp. Pre- Hearing Brief at 15-18.) Fund shareholders authorized the creation of the Treasury Bill Portfolio (1987); the Aggressive Growth Portfolio (1990); and the Versatile Bond Portfolio (1991). The Fund’s four portfolios are an individual series of the single registered investment company, and there is a single board of directors (hereinafter "Board" or "Fund Board") for all portfolios. (Resp. Ex. 501.) The Permanent Portfolio peaked with about $104 million in assets in 1990. The Treasury Bill Portfolio grew from approximately $31 million in assets in 1989 to $61 million in assets in 1990. (Div. Ex. 13.) In February 1997, the Fund had total assets of approximately $200 million. (Resp. Answer at 9.) In 1987, WMM created World Money Securities, Inc. ("WM Securities"), a registered broker-dealer.[7] Mr. Sergy was a director and officer of WM Securities. (Tr. 638.) WM Securities paid Mr. Sergy a salary for serving as its from 1990 through 1996. (Tr. 643-44.) Mr. Coxon was a registered representative, a director, and the corporate secretary of WM Securities. He resigned his positions as director and officer in August 14, 1990. (Tr. 874; Resp. Proposed Findings of Fact and Conclusions of Law at 2.) Mr. Chandler was also an officer of WM Securities. The National Association of Securities Dealers ("NASD") restricted WM Securities to the sale of direct participation programs and investment company shares, in part because no officer of the broker-dealer was a licensed financial principal. (Tr. 764-67; Div. Exs. 140, 141.) In May 1989, Fund shareholders approved a change in the investment policies of the Permanent Portfolio to permit formation of a subsidiary to conduct broker-dealer activities. The Board authorized the Permanent Portfolio to contribute capital "in amounts limited to those reasonably necessary to cover the Subsidiary’s organizational expenses and provide it with working capital, and in any event not to exceed 1% of the Permanent Portfolio’s net assets." (Div. Ex. 8 at 4.) On July 15, 1989, the Fund Board approved creation of Permanent Portfolio Brokerage, Inc., a wholly owned broker-dealer subsidiary of the Permanent Portfolio. At WMM’s recommendation, the Fund capitalized the broker dealer at $950,000 or 1% of the Permanent Portfolio’s assets.[8] (Div. Ex. 39.) The Board’s decision was based on information supplied to it by WMM that included estimated organizational costs of $34,900, annual operating costs of $37,100, and proposed activities by WM Securities that would result in cost savings for the Fund. (Div. Ex. 39.) The proposed activities were: (1) execute orders from the Permanent Portfolio to purchase and sell securities by placing such orders through clearing members of the New York Stock Exchange; (2) participate in secondary offerings of securities being purchased by the Permanent Portfolio; and (3) participate in underwritings of primary and secondary offerings of securities to the Fund, other investment companies and the general public. (Div. Ex. 39.) On December 1, 1989, WMM gave WM Securities to the Permanent Portfolio. (Tr. 875.) On December 7, 1989, Mr. Sergy requested NASD approval for WM Securities’s plan to change the nature of its business beyond the sale of direct participation programs and investment company shares to include four new proposed activities: (1) as a broker or dealer making inter-dealer markets in corporate and over-the-counter securities; (2) as a broker or dealer retailing corporate securities over-the-counter; (3) underwriter or selling group participant (corporate securities other than mutual funds); and (4) acting as a mutual fund underwriter or sponsor. (Div. Ex. 141.) Mr. Sergy’s letter to the NASD falsely represented that WM Securities had two registered principals. On January 17, 1990, the Permanent Portfolio merged WM Securities with Permanent Portfolio Brokerage, Inc. and the surviving entity became WM Securities, a wholly owned subsidiary of the Permanent Portfolio capitalized at $950,000. (Div. Exs. 39; 44 at 2.) When they represented the optimistic scenario for a Fund- owned broker-dealer to the Board and arranged for WMM to give the Fund its broker-dealer, Mr. Sergy and Mr. Coxon did not inform the Board that they were not financial principals, and that as a result WMM’s broker-dealer did not have and was unlikely to receive NASD authorization to perform the proposed activities. (Tr. 307-12, 766.) Furthermore, Mr. Sergy and Mr. Coxon knew the NASD would not lift the restrictions and permit the broker-dealer to perform the full range of the proposed activities because WM Securities did not have a financial principal.[9] (Tr. 764-67; Div. Ex. 141.) On May 18, 1996, WM Securities’s application to withdraw its broker-dealer registration became effective. WM Securities had a negative net worth when it was liquidated at the end 1996. (Tr. 564-66.) At the parties’ request, I dismissed WM Securities as a Respondent. The Fund paid WMM the following advisory fees:[10] Fiscal Permanent Treasury Versatile Aggressive Year Portfolio Bill Bond Growth Portfolio Portfolio Portfolio 1989 $867,039 $53,343 n/a n/a 1990 $835,851 $114,838 n/a n/a 1991 $750,844 $553,518 $3,768 n/a 1992 $641,070 $1,276,888 $1,015 $16,671 (Div. Exs. 22 at 14, 24 at 14.) Mr. Coxon decided what materials the Fund Board received in connection with expenditures under the Fund’s 12b-1 plan. Mr. Sergy made an initial proposal that was reviewed by Mr. Rolnick before it went to Mr. Coxon. Based on WMM’s recommendation, the Board included the following distribution expenses in the Fund’s 12b-1 plan in calendar 1990:[11] Expense Amount allocated to Fund Legal fees $33,308.44 General partner fees $63,000.00 Consulting fees $91,447.00 Printing and mailing $191,777.11 Printing prospectus $33,510.44 Accounting $38,661.96 Transfer agent fees $224,872.37 Registration fees $59,424.09 Allocable charges by $13,524.24 custodian Travel $50,066.98 Commissions $32,204.00 Expenses PP Info. $230,662.52 Total $1,062,459.15 (Div. Ex. 133 at 3.) After application of the 50% matching provision and the 0.25% cap, WMM charged the Fund’s 12b-1 plan $516,387 in calendar 1990.[12] (Tr. 1479; Div. Exs. 133, 147; Div. Pre-Hearing Brief at 19-20.) Respondents deny the Division’s assertion that WMM was in severe financial difficulty in 1988 and 1989. (Div. Post-Hearing Brief at 8-19.) I accept that WMM’s stated goal was to keep its net income low to minimize its partners’ income tax liability. (Tr. 194-96.) Nonetheless, the record is persuasive that from its inception WMM strained to find funds to spend on marketing and to finance Mr. Coxon’s many ideas for new financial products. (Resp. Post-Hearing Brief at 9-12; Tr. 935, 939-40, 2202.) For several years, Mr. Coxon, Mr. Chandler, and Mr. Sergy received no compensation. To secure their continued efforts, Mr. Coxon promised Mr. Chandler and Mr. Sergy shares of the general partners’ interest in WMM’s future profits in lieu of compensation. Mr. Browne sold his interest in WMM in 1989 because there had been no partnership distributions since 1982. (Tr. 1427-28.) By mid-March 1989, the Adviser collected approximately $294,000 from the Permanent Portfolio and $54,000 from the Treasury Bill Portfolio in 12b-1 marketing fees, or 121% and 49% of the yearly marketing fees, respectively, for these two portfolios. (Div. Post-Hearing Brief at 14.) In 1988 and 1989, WMM’s auditor questioned whether it was a going concern. (Tr. 125-26, 172.) WMM’s balance sheet on December 31, 1989, showed a net worth of negative $333,977, which, according to WMM’s auditor, represented the results of "consolidated operations" since inception.[13] (Tr. 151; Div. Ex. 139.) WMM’s liabilities included a bank overdraft of $44,484, accounts payable of $264,000, and payables to related parties, which included expenses paid by the Fund which were properly reimbursable by WMM of $349,711.86. (Tr. 144, 151-52.) For the year ended December 31, 1989, WMM lost nearly $250,000 even before it wrote off product development costs it had been capitalizing. (Tr. 153.) The net loss for the year ended December 31, 1989 was $752,287. As of that date, current liabilities exceeded current assets by $382,984 and total liabilities exceeded total assets by $333,977. (Tr. 153.) WMM’s income tax returns were prepared on a cash basis. WMM reported a profit of $8,707 in 1988; a profit of $47,650 in 1989; a loss of $1,247 in 1990; and a profit of $168,474 in 1991. (Resp. Exs. 656-59; Tr. 198.) William J. Michiels, the Division’s accounting expert, opined that it was improper for WMM not to keep its financial statements on a consolidated basis. (Tr. 1466-69.) Mr. Michiels was able to view WMM on a consolidated basis using information in the notes to the financials. (Tr. 189-90, 1457-59.) Mr. Michiels was highly critical of WMM’s decision to capitalize the organizational or product development costs for three of its wholly owned subsidiaries as product development costs in its 1988 financials. (Tr. 1456-66.) According to Mr. Michiels, it is highly unusual for the most significant item on the balance sheet to be capitalized development costs as was true for WMM. (Tr. 1467-69.) II. RULINGS ON ISSUES The order of presentation follows the Division’s Post- Hearing Brief. My findings are based on the record and my observation of the witnesses’ demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). I have considered all proposed findings and conclusions and arguments raised by the parties and accept those consistent with this decision. The Division charges that Respondents violated Sections 206(1) and (2) of the Advisers Act; Sections 10(a), 10(b), 12(b), 13(a)(3), 17(d), and 34(b) of the ICA and Rules 12b-1 and 17d-1 thereunder; Section 17(a) of the Securities Act; and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.[14] Before considering the specific allegations, I will first deal with two general matters. Respondents claim that they have a complete defense to most of the allegations because they reasonably relied on legal advice rendered by Mr. Rolnick, Fund counsel. (Resp. Post-Hearing Brief at 66-72.) This defense is unavailable to Respondents for several reasons. First, case law has long established that an investment adviser cannot shift to counsel the adviser’s duty of compliance with the Advisers Act, and that the investing public is entitled to the fullest protection of the law regardless of what counsel’s view may have been. Dow Theory Forecasts, Inc., 43 S.E.C. 821 (1968). Second, to establish reliance on counsel, Respondents would have to show that they: (1) made a complete disclosure to counsel of the intended action; (2) requested counsel’s advice as to the legality of the intended action; (3) received counsel’s advice that the conduct would be legal; and (4) relied in good faith on that advice. Markowski v. SEC, 34 F.3d 99, 105 (2d. Cir. 1989); William H. Gerhauser, Sr., 68 SEC Docket 1289, 1300 n.26 (Nov. 4, 1998) (citing John Thomas Gabriel, 51 S.E.C. 1285, 1292 (1994), aff’d, 60 F.3d 812 (2d Cir. 1995)); Richard J. Lanigan, 59 SEC Docket 2693, 2696 n.9 (July 27, 1995). Respondents have not made the necessary showing. Mr. Coxon and Mr. Sergy claim they relied on Mr. Rolnick’s legal opinions. There is no evidence, however, that Respondents made complete disclosure to Mr. Rolnick as to their intended actions, requested that he formulate an opinion on whether the actions they intended to take were legal, received an affirmative legal opinion, and then acted in good faith relying on that opinion.[15] This voluminous record does not contain a single written legal opinion drafted by Mr. Rolnick in response to a request by Respondents.[16] Mr. Coxon testified that Mr. Rolnick’s family took custody of his records following his death. Nonetheless, it is reasonable to expect that the Adviser’s files would contain copies of legal memoranda it requested and presumably paid for. (Tr. 2210-11.) Next, "[w]hile reliance upon advice of counsel is a fact that may be taken into account in determining what sanctions are appropriate in the public interest, it does not excuse a failure to comply with applicable provisions of the law." Kidder Peabody & Co., 43 S.E.C. 911, 914 n.1 (1968); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 182 (2d Cir. 1976); SEC v. Savoy Indus. Inc., 665 F.2d 1310 (D.C. Cir. 1981). Finally, Mr. Rolnick’s position as legal counsel to the many entities owned and controlled by Mr. Coxon puts in question his ability to render disinterested advice where Mr. Coxon was an advocate on one side of the issue. There is no indication that Respondents ever sought a review of Mr. Rolnick’s views by outside counsel. The second general matter to address concerns the standard to apply to a "willful" violation. Willfulness does not require an intent to violate the law, nor does it require "deliberate or reckless disregard of a regulatory requirement." See Jacob Wonsover, Exchange Act Rel. No. 41123, 1999 WL 100935, at *9 (Mar. 1, 1999). To commit a willful violation, a Respondent need only have intentionally committed the act which constitutes the violation. Arthur Lipper Corp., 547 F.2d at 180; Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); James E. Ryan, 47 S.E.C. 759, 761 n.9 (1982). The misrepresentations in this proceeding were material because there is a substantial likelihood that a reasonable shareholder would consider the information important to an investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992). A. Section 206(2) of the Advisers Act The Division charges that WMM willfully violated Section 206(2) of the Advisers Act and that Mr. Coxon and Mr. Sergy willfully caused and aided and abetted that violation by the following actions or omissions: (1.) Not disclosing to the disinterested directors that in March 1990 the manager working on the Fund’s audit believed that charging the Fund with 100% of transfer agent fees and 100% of auditing fees was aggressive accounting and might cause some exposure to the Fund; (2.) Obligating WM Securities to pay up to $200,000 to market two other Fund portfolios - the Treasury Bill Portfolio and the Aggressive Growth Portfolio in 1990 and 1991; (3.) Causing WM Securities to enter into a five year lease for office space used by others; (4.) Causing WM Securities to advance $40,000 to a WMM subsidiary, Passport Financial, Inc., and to subsequently lose $20,000 of that advance; and (5.) Causing the Fund’s Permanent Portfolio to acquire a Symantec Corporation ("Symantec") call option from an investment adviser client of Mr. Coxon on unfavorable terms for the Fund. Ruling It has been established for almost forty years that the Advisers Act reflects a Congressional recognition of the "delicate fiduciary nature of an investment advisory relationship." SEC v. Capital Gains Research Bureau Inc., 375 U.S. 180, 191 (1963) (quoting 2 Louis Loss, Securities Regulation, 1412 (2d ed. 1961)). Section 206(2) of the Advisers Act makes it unlawful for any investment adviser, by use of the mails or of any means or instrumentality of interstate commerce, to engage in any transaction, practice, or course of business which operates as a fraud upon any client or prospective client. A violation of Section 206(2) does not require a showing of scienter. Capital Gains, 375 U.S. at 200. It is well settled that the antifraud provisions in the Advisers Act should be interpreted in line with the interpretations of the antifraud provisions of the securities acts on which this provision was modeled. 2 Tamar Frankel, The Regulation of Money Managers, 177 (1978). Sections 206(1) and 206(2) of the Advisers Act establish a fiduciary duty for investment advisers to act for the benefit of their clients. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). "A fiduciary relationship arises between an adviser and his client because the adviser has a duty, created by his undertaking, to act primarily for the benefit of another . . . in matters connected with his undertaking." 2 Frankel, supra, at 343. Fiduciaries should be loyal to their beneficiaries. The duty of loyalty is implicit in the nature of the relationship. The fiduciary acts for the benefit of the beneficiary, and the beneficiary must trust him and rely on him. If the fiduciary’s interests conflict with his beneficiary’s or if he has interests that might subvert the unbiased and loyal performance of his duties, he breaches his duty, unless he discloses the conflict to the beneficiary and obtains the beneficiary’s consent. A fiduciary must therefore refrain from putting himself in a position of conflict of interest since it does not permit him "to retain the freedom of judgment and action" that he ought to have as manager of other people’s money. A fiduciary should be honest and deal fairly and in good faith with the beneficiary. He should disclose conflicts of interest, avoid intentional misconduct, and refrain from competing with or seizing opportunities of his beneficiary. Id. at 371-72 (footnotes omitted); see also Capital Gains, 375 U.S. at 187-92. The Commission has affirmed as "hornbook law" that a fiduciary cannot compete with his beneficiary with respect to the subject matter of the relationship, absent disclosure and a contrary agreement. E.F. Hutton & Company, Inc. now known as Shearson Lehman Hutton, Inc., 41 SEC Docket 473, 478 (July 6, 1988); see also Restatement (Second) of Agency, § 393, Cmt. b (1957); Nicholas Wolfson, et al., Regulation of Brokers, Dealers and Securities Markets, §2.03 at 2-15 (1977) ("The developing law - both in the Commission and the courts - supports the imposition of an affirmative duty of disclosure whenever a broker-dealer has a substantial interest in a transaction which may be adverse to his client"); Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir. 1970). A breach of an adviser’s fiduciary duty may constitute a fraud within the meaning of Section 206(2) of the Advisers Act as well as the antifraud provisions of the Securities Act and the Exchange Act. 2 Frankel, supra at 373, n.10 (citations omitted). Respondents, however, claim that they cannot be liable "whether under Section 206(2) or otherwise, for securities laws violations where they merely acted on business proposals that were approved and sanctioned by the Fund’s board of directors." (Resp. Post-Hearing Brief at 46. As authority they cite Cohen v. Ayers, 596 F.2d 733, 740 (7th Cir. 1979); Burton v. Exxon Corp., 583 F. Supp. 405, 415 (S.D.N.Y. 1984); Santa Fe Ind. v. Green, 430 U.S. 462 (1977); International Ins. Co. v. Johns, 874 F.2d 1447, 1461 (11th Cir. 1989); Hanson Trust PLC v. ML SCM Acquisition, Inc., 781 F.2d 264, 273 (2d Cir. 1986); Gaillard v. Natomas Co., 208 Cal. App. 3d 1250, 1263 (1989). I reject this defense as inapplicable for several reasons. The first is that the business judgment rule "immunizes management from liability in corporate transactions undertaken within both power of corporation and authority of management where there is reasonable basis to indicate that transaction was made with due care and in good faith." Black’s Law Dictionary, 138 (6th ed. 1991). The allegations at issue do not concern corporate management. These allegations question the actions of a partnership in its capacity as an investment adviser to a mutual fund. Specifically, the allegations concern a general partner who controlled the partnership and a limited partner who was a knowing and willing participant in the activities. The courts have long recognized the differences between the role of corporate management and a mutual fund’s investment adviser: In the usual corporate situation, the interests of management and shareholders are identical on most matters. Since the officers who run the corporation are paid directly by the corporation and usually have a substantial equity interest in it, they devote themselves to profit maximization and thus act in the best interests of both the corporation and themselves. Control of a mutual fund however, lies largely in the hands of the investment adviser, an external business entity whose primary interest is undeniably the maximization of its own profits. Tannenbaum, 552 F.2d at 405. The cases cited by Respondents are also inapplicable because they are premised on the assumption that full disclosure was made to the Board and that the parties operated in good faith. The preponderance of the evidence here is that Respondents did not make full disclosure and did not act with due care or in good faith. (1.) Transfer Agent and Auditing Fees Michael Cuggino was the audit manager on the Fund’s 1989 and 1990 audits. Mr. Cuggino worked on every Fund audit from 1986 through 1990. In March 1990, he told Mr. Sergy, the contact person for the Fund on the 1990 audit, that including 100% of transfer fees and 100% of accounting fees in the Fund’s 12b-1 plan was "aggressive" accounting and might cause some exposure for the Fund.[17] (Tr. 57-60, 69-70, 695-99, 814-15.) Aggressive accounting involves some risk or exposure because the treatment is questionable, suspect, involves a gray area, or stretches the limits of what is an allowable practice. (Tr. 487- 88, 698-99, 1466-67.) Mr. Sergy relayed Mr. Cuggino’s concerns to Mr. Coxon. Mr. Coxon acted in a contradictory manner. On the one hand, he claims he did not interpret Mr. Cuggino’s concerns as being a warning message from the auditors. On the other hand, he thought enough of the comments to tell Mr. Rolnick "what the auditors had said." (Tr. 2237.) Mr. Coxon concluded that Mr. Cuggino’s concerns were not a problem so neither he nor Mr. Sergy ever brought Mr. Cuggino’s concerns to the attention of the Fund’s audit committee or the Fund’s disinterested directors. (Tr. 724-25, 2237.) Ruling I find that Respondents’ conduct violated the fiduciary duty they owed to the Fund. WMM’s fiduciary duty arose from its adviser status. Mr. Coxon owed a fiduciary duty to the Fund because he controlled the adviser both as its general partner and by his actions. He also owed a fiduciary duty to the Fund because he was a director and its president. Mr. Sergy’s fiduciary duty to the Fund arose from his status as an owner of and consultant to the Adviser and because he was a Fund director and Fund officer. Respondents’ fiduciary duty required that they inform the disinterested members of the Fund Board that an audit manager with supervisory responsibility on an ongoing audit voiced concern about the aggressive use of accounting policies. This is especially true here where the individual Respondents not only worked for the Adviser but were owners of the Adviser, and where the policies in question favored the Adviser over the Fund. Respondents had an obligation to guard against self-dealing and they did not do so. Respondents contend that they were justified in not informing the Fund Board of Mr. Cuggino’s concerns because the head of the audit team did not present them formally and/or the concerns were not received in a formal audit document. I disagree. It is sufficient that the matter was material and conveyed by a responsible person on the audit team. Mr. Cuggino occupied a supervisory position as audit manager and his four years of experience auditing the Fund made him knowledgeable about Fund matters.[18] In these circumstances, it was wrong for Respondents not to have provided this information to the disinterested Board members whose only allegiance was to the Fund.[19] See Moses v. Burgin, 445 F.2d 369, 377 (1st Cir.) (finding that the test of whether a matter should be brought to the attention of a disinterested director was whether the matter is one that could be of possible significance). The testimony of the witnesses with expertise on the treatment of distribution expenses was that the matter should have been brought to the Board or that the Adviser should have consulted with independent counsel. (Tr. 1109.) Respondents did neither. It is irrelevant that Mark Tier, a disinterested Fund director, would have approved aggressive accounting practices as long as they were legal and ethical.[20] (Tr. 486-89.) The issue is that Respondents did not inform the Board of the auditors’ concerns, and the Board was unable to formally address the issue. Respondents never provided Mr. Tier with a discussion by the Fund’s auditors of the Fund’s 12b-1 plan. (Tr. 457-58.) The Division contests $209,491.45 of the $224,872.34 in transfer agent fees that WMM charged the Fund’s 12b-1 plan in 1990. The Division does not challenge a small amount of transfer charges that it found to be "clearly allocable to new account transactions." (Div. Post-Hearing Brief at 49 n.6.) The Division challenges audit fees of $46,630 which it represents as the sum of Ernst & Young’s audit fees of $34,500 and WMM’s auditor’s fees of $12,130. (Div. Post-Hearing Brief at 26; 60.) For the reasons stated, I find that the Respondents willfully violated Section 206(2) of the Advisers Act in calendar 1990 by charging the 12b-1 plan with transfer agent fees totaling $209,491.45 and auditing fees of $38,661.96.[21] (Div. Ex. 133 at 5.) (2.) WM Securities Marketing Expenses (Capitalization and Selling Agreement) The Division alleges that Respondents violated Section 206(2) because they implemented a scheme to use the Permanent Portfolio’s assets to finance an aggressive marketing effort for the Treasury Bill Portfolio, and to a lesser extent the Aggressive Growth Portfolio. As part of this scheme, Respondents caused the Fund Board to authorize formation of a broker-dealer subsidiary for the Permanent Portfolio and then caused the Board to capitalize the broker-dealer with $950,000.[22] (Div. Post- Hearing Brief at 32-33.) The two issues are inextricably bound so I will consider them together. At the annual meeting on May 31, 1989, Fund shareholders authorized the Permanent Portfolio to contribute capital to the broker-dealer subsidiary in amounts limited to those reasonably necessary to cover the subsidiary’s organizational expenses and provide it with working capital, and in any event not to exceed 1% of the Permanent Portfolio’s net assets. The undisputed evidence is that the $950,000 provided was almost ten times more than was necessary to capitalize and operate a broker-dealer for the first year. (Tr. 1300-07.) Respondents made false representations and omitted to disclose material information to the Fund Board. Specifically, Mr. Coxon and Mr. Sergy knew that the newly capitalized broker-dealer did not have NASD approval to conduct the type of activities that they represented would result in cost savings to the Fund. Mr. Coxon and Mr. Sergy also knew when they were urging the Fund Board to capitalize the broker dealer at the $950,000 level that the NASD would not approve all the proposed activities because WM Securities did not have a financial principal. Based on the information that Respondents supplied, the disinterested directors erroneously believed the new broker-dealer could perform a wide range of activities because as one disinterested director explained, "we didn’t know at the time all the activities we would undertake, so we put the one percent in." (Tr. 546.) Mr. Sergy acknowledged that in the summer of 1989 there were discussions about a direct marketing program for the new Treasury Bill and Aggressive Growth Portfolios costing close to $300,000. WMM did not have the funds to finance the marketing campaign that Mr. Coxon wanted to conduct for these two new portfolios. The evidence is persuasive that WMM arranged for WM Securities’s $950,000 capitalization to provide a funding source for this marketing effort. (Tr. 969-71.) On February 1, 1990, WM Securities and WMM agreed that WM Securities would pay PP Info. up to $200,000 to conduct a promotional campaign for the Treasury Bill Portfolio and the Aggressive Growth Portfolio ("Selling Agreement").[23] (Div. Ex. 121; Tr. 281-82, 965.) WM Securities’s ultimate cost under the Selling Agreement in calendar 1990 was $182,005.[24] (Div. Ex. 11, 95.) WMM agreed to compensate WM Securities at the rate of 0.25% of new assets in the Treasury Bill Portfolio and at the rate of 0.50% of new assets in the Aggressive Growth Portfolio over the next six and a half years. (Div. Ex. 121, 2; Tr. 331, 349, 965.) The so-called "trailing commissions" were payable once a year within seventy- five days of the end of the calendar year. On March 18, 1991, the parties amended the Selling Agreement: WM Securities agreed to contribute as much as an additional $200,000 to pay for marketing expenses of the two funds and WMM agreed to continue the compensation arrangement for the next six years. (Tr. 349.) WM Securities paid $154,566 in marketing costs related to mailings under the Selling Agreement in 1991.[25] (Div. Ex. 96, 11.) Ruling Mr. Coxon signed the Selling Agreement on behalf of WMM and the Fund. (Tr. 966-67.) Mr. Sergy signed as president of WM Securities when he was a WMM consultant and an indirect owner.[26] (Tr. 972.) Mr. Sergy was also a Fund director and officer. In circumstances where they had ties to both sides of the transaction, Respondents were required to exercise caution to make sure that they put the interests of the Fund before their own interests. They did not do so. Respondents violated Section 206(2) because they violated the fiduciary duty they owed to the Fund by misrepresenting or omitting material information about the operations of the proposed broker-dealer. It is reasonable to assume that the falsely optimistic presentation of possible cost savings for the Fund caused the Fund shareholders and Board to authorize and then overcapitalize the Fund’s new subsidiary. In addition, at the Adviser’s recommendation the Board entered an agreement using the subsidiary’s funds that advantaged the Adviser at the expense of the Fund. At the time they proposed that WM Securities enter the Selling Agreement, Mr. Coxon and Mr. Sergy knew that no independent broker-dealer would enter a selling agreement by which the broker-dealer agreed to use up to $200,000 of its funds to promote Fund shares. Mr. Coxon and Mr. Sergy also knew that no independent broker-dealer would agree to wait until seventy- five days after the end of the calendar year to receive commissions earned from the promotional activities completed during the year.[27] (Tr. 769-73, 970-71.) Expert testimony confirmed that Mr. Coxon and Mr. Sergy’s understanding was accurate and that no other broker-dealer would have entered this agreement. (Tr. 1291-93.) Respondents did not make the independent directors aware in 1990 and in 1991 that they were recommending that the Fund enter and later renew a Selling Agreement that advantaged the Adviser and disadvantaged the Fund according to standards that existed in the industry. It was wrong for the Respondents to propose and advocate such a one- sided transaction and they did so twice, in 1990 and again in 1991. (3.) World Money Securities’s Five-Year Lease On May 28, 1991, WMM and WM Securities entered into separate five-year leases for adjoining office space at 6245 Second Street, Petaluma, California. A diagram of the rental space shows one large office area and does not distinguish between the areas covered by the two leases. The mail address for WMM, WM Securities, and the Fund was Suite 102. WM Securities’s five-year lease was for $2,326 a month beginning January 1, 1992, with an annual 5% escalator. The WM Securities space consisted of two offices according to Mr. Sergy. The diagrams, however, show three offices. WM Securities leased offices to Mr. Sergy, Mr. Rolnick, and Mr. Cuggino for monthly rents of $100, $500, and $500, respectively. (Resp. Exs. 526- 28.) The subleases reduced the cost to WM Securities to $1,226 a month. WMM’s space consisted of three offices. Mr. Coxon used one of the offices but did not pay rent. An office next to the one used by Mr. Coxon was a conference room. Mr. Rolnick paid WMM $500 a month and Mr. Sergy paid WMM $100 a month for their offices. Mr. Sergy had been a director, president, and treasurer of WM Securities since 1987. (Tr. 638.) He was not paid a salary as president until WM Securities became a subsidiary of the Permanent Portfolio.[28] (Tr. 878-79.) He testified that he operated WM Securities out of his office. (Tr. 833-34.) Mr. Sergy is not sure whether WM Securities made payments under the lease. (Tr. 837-40.) Ruling Respondents emphasize the reasonableness of the rent level and the projected activities of WM Securities, which they claim made it reasonable in 1991 for WM Securities to enter into a five-year lease of this magnitude. The Division does not contest this evidence. However, these aspects of the lease are not the determinative issues. The Division charges that Respondents violated Section 206(2) as to the lease because the Fund through WM Securities was paying the rent for Mr. Sergy’s office space and the common area. WMM, in effect, was avoiding rent payments for itself, the Fund, and Bullion Corp., a wholly owned subsidiary of WMM, because all the entities mentioned used the common area and because Mr. Sergy, in his capacities as a director and officer of the Fund, consultant to WMM, and an officer of Bullion did work for these entities in the office space he occupied. (Div. Post-Hearing Brief at 39-41.) The business judgment rule is inapplicable to Respondents in this situation because the Board did not approve the WM Securities lease. Respondents, therefore, did not "merely" act on Board sanctioned proposals. (Resp. Post-Hearing Brief at 87.) Mr. Sergy admits that he signed the lease on behalf of WM Securities at Mr. Coxon’s recommendation. (Resp. Ex. 20, 523.) However, recommendation is too mild a term. From the plethora of detailed evidence in the record and my observation of the witnesses, I find that Mr. Sergy was acting at Mr. Coxon’s direction when he signed the lease as president of WM Securities in 1991. Mr. Sergy was indebted to Mr. Coxon for his positions with WM Securities and his roles as a Fund director and officer, as a consultant to WMM, and as an officer and director of Bullion. Mr. Coxon, through his ownership of WMM and the force of his ideas and personality, controlled all the entities involved in this proceeding and he exercised that control. This conclusion is buttressed by the fact that Mr. Sergy did not know or could not recall the details of his rental payments. (Tr. 837-40.) I conclude that Respondents committed fraud in their investment adviser relationship with the Fund when they had WM Securities enter the lease because they put WMM’s interests before the interests of the Fund in violation of their fiduciary duty. The evidence is persuasive that Respondents viewed the occupancy of a single space under two leases as a way to get more space for WMM and remedy its problem of inadequate and perhaps unsafe office space. According to Mr. Coxon, the old office space was fine for him but not for Mr. Sergy, Mr. Rolnick, and Mr. Cuggino. (Tr. 2259-60.) Mr. Cuggino was quite critical of WMM’s former location. (Tr. 1801.) The record has no evidence that the lease arrangement benefited WM Securities. For example, the diagram shows Mr. Rolnick with one office next to Mr. Coxon’s office. Mr. Rolnick paid WMM and WM Securities for a single space. The testimony and documentation support Mr. Coxon’s position that he worked closely with Mr. Rolnick. When Mr. Rolnick died, WMM paid WM Securities Mr. Rolnick’s rent. Mr. Rolnick was legal counsel to WM Securities along with WMM, the Fund, and Bullion Corp. The preponderance of the evidence is that the WM Securities’s lease and sublease to Mr. Rolnick was done to benefit WMM and Mr. Coxon, not WM Securities. Mr. Coxon testified during the investigation that prior to the lease, WM Securities had been paying WMM a "token rent." At the hearing, he testified that WM Securities had been paying WMM rent of $1,200 a month. (Tr. 2262-63.) Presumably, Mr. Coxon was trying to imply that the new lease did not obligate WM Securities to any greater financial constraint. Mr. Coxon’s belief, however, is contradicted by Mr. Sergy’s recollection that WM Securities had no employees and paid no rent before it was gifted to the Fund. (Tr. 669.) Finally, the overall impression is that WM Securities’s plans for expansion provided a plausible excuse for a scheme concocted to benefit primarily WMM. WMM was the guarantor on WM Securities’s lease and paid the lessor $14,135 in 1995 when WM Securities was unable to do so. (Resp. Ex. 687.) Mr. Coxon and Mr. Sergy believe that what benefited WMM benefited the Fund. I find that Respondents violated their fiduciary duty to the Fund because they put their loyalty to the Adviser ahead of their duty to do what was best for the Fund. (4.) WM Securities’s Absorption of $20,000, Half an Advance to a WMM Subsidiary One of WMM’s several wholly owned subsidiaries is Passport Financial, Inc. ("Passport"). Mr. Coxon incorporated Passport in 1993, and expected that it would produce and sell publications and services related to offshore financial planning for U.S. investors. Passport also intended to conduct business using direct mail marketing and sales techniques similar to those employed by the Fund. (Div. Ex. 127.) Mr. Coxon is Passport’s president and a director, Mr. Cuggino is treasurer, and Mr. Chandler, an owner of PP Info., is vice-president and a director. Messrs. Sergy, Martin and Werner Schwarz are directors, and Mr. Rolnick was legal counsel. (Div. Ex. 127.) Passport’s address was the same as WMM and the Fund. In 1993, WM Securities advanced Passport $39,011 as provided for in an unsigned agreement ("Passport Agreement"). The Passport Agreement obligated WM Securities as distributor to advance Passport up to $40,000 to finance the prospective offering of securities. It further provided that WM Securities, on a best efforts basis, would solicit offers and sales of the offering. If the Passport offering did not close, WMM agreed to pay underwriting expenses over $40,000, and, if the offering closed, WMM agreed to reimburse WM Securities for 50% of the underwriting costs it advanced.[29] (Div. Ex. 125.) Passport anticipated offering to sell 200,000 shares of common stock and warrants. The shares were to be sold at an initial offering price of $10 each through December 31, 1994, with a $2,000 minimum investment. The exercise price of each warrant was to be $10 through December 31, 1994, and $15 thereafter. (Div. Ex. 126.) Passport was to pay WM Securities at the rate of 6% of the offering price of each share sold and the same percentage for each warrant exercised subject to certain conditions. The Passport offering did not take place. WM Securities lost $20,289 when WMM reimbursed it only $18,722. (Div. Ex. 10, 99.) The Division alleges Respondents violated Section 206(2) because they engaged in improper self-dealing by having WM Securities advance Passport $39,011. Specifically, the Division alleges that Respondents took advantage of their dual affiliations: Mr. Sergy was an officer of both Passport and WM Securities; and WMM was Passport’s owner and the adviser to WM Securities’s parent, the Fund. (Div. Post-Hearing Brief at 41.) Ruling I find Respondents breached their fiduciary duty to the Fund and violated Section 206(2) because they advocated a transaction which put the Adviser’s interests ahead of the Fund’s interests. I reach this conclusion because the persuasive evidence is that no independent broker-dealer would advance its own funds to pay the underwriting costs of such an offering. (Tr. 335-36, 1296- 98.) Illustrative of this fact is that WM Securities was expected to enter "selling agreements" with other broker-dealers who would agree, on a best efforts basis, to solicit offers and sales from their customers for a portion of the Passport offering. WM Securities was entitled to receive a 6% commission from Passport. Yet, WM Securities found it necessary to offer independent "downstream" broker-dealers better terms to convince them to participate in the Passport offering. WM Securities offered these broker-dealers commissions of 5% of the selling price of the shares. Moreover and most importantly, the "downstream" broker dealers were not required to pay a portion of the underwriting costs. It was fraudulent for Respondents to advocate that the Fund, through WM Securities, enter a transaction that disadvantaged the Fund because it placed the Fund assets at risk and contained terms that independent broker- dealers would find unacceptable. For the reasons stated previously, I reject Respondents’ defense that the business judgment rule shields them from liability because the Fund Board approved the transaction between WM Securities and Passport. (Tr. 503-05.) The two independent board members selected by Mr. Coxon placed considerable trust in his honesty and relied on the information WMM provided to them. I find that reliance was misplaced. The record is not persuasive that the Adviser fully informed the Board of the unusual nature of the transaction. Specifically, the testimony of the disinterested directors did not indicate that at the time they approved the Passport Agreement they were aware that other broker-dealers would not have agreed to similar terms. (Tr. 390- 92, 503-05.) In addition, one of the independent directors had a position with Passport. (Tr. 392.) Finally, the Respondents’ evidence that the upside potential to WM Securities was very positive when measured against a maximum risk of $40,000 is unpersuasive. (Compare Tr. 2182-89 with 2323-38.) (5.) Acquisition of the Symantec Call Option/Warrant[30] On January 27, 1990, at Mr. Coxon’s recommendation, the Fund Board considered the purchase by the Permanent Portfolio of a "long-term deep-in-the-money call option" of Symantec common stock. (Div. Ex. 44.) "Long-term" refers to the fact that the option was for fifteen years exercisable at any time. "Deep in the money" refers to the fact that the amount paid per option was much lower than the per share market price. On April 6, 1990, the Permanent Portfolio acquired from Andrew Layman an option to purchase 22,500 shares of Symantec, a writer of computer software programs, for $329,400. (Div. Ex. 112.) The disinterested directors and Mr. Sergy knew that Mr. Layman was one of Mr. Coxon’s private investment adviser clients. Mr. Coxon signed the option on behalf of the Fund and Mr. Sergy provided the attestation. The Division claims that Respondents violated Section 206(2) of the ICA because Mr. Coxon and Mr. Sergy did not inform the Board of a "Right of Prevention" provision in the option agreement. Specifically, the Right of Prevention provision allowed the maker of the option seven days, following receipt of written notice from the Fund that it wanted to exercise the option, to decide whether to deliver the stock shares or, alternatively, to make a cash payment to the Fund within fourteen days of the Fund’s notice. (Div. Ex. 112.) The evidence is persuasive that this provision put the Fund, the holder of the option, at a disadvantage vis-à-vis Mr. Layman, the maker of the option, because it favored his "tax avoidance" objectives at the expense of the Permanent Portfolio’s ability to manage risk. (Tr. 919-21, 1000-08, 1011.) Ruling Mr. Coxon violated his fiduciary duty to the Fund and thus Section 206(2) because he did not make full disclosure of material terms of the Symantec transaction, specifically the Right of Prevention provision. As Adviser to both the Fund and Mr. Layman, Mr. Coxon, at the very minimum, was required to get an opinion from a disinterested third party that this course of action was in the Fund’s best interests. I reject the Respondents’ position that the Board’s review and approval eliminated the possibility of a violation. The persuasive evidence is that the Board place great reliance on Mr. Coxon’s representations, and he did not provide the Board with complete, objective information to use in making its judgment. For example, there was no independent third-party review of Mr. Coxon’s analysis of the financial and tax benefits of the transaction that Mr. Coxon presented to the Board. (Div. Ex. 44.) Furthermore, the Board did not know that Mr. Layman considered the Right of Prevention provision to be of value. (Tr. 2100.) Respondents claim that both sides to the transaction were represented by counsel. I disagree. Mr. Rolnick, legal counsel to the Fund, WMM, and Mr. Coxon’s other enterprises, advised the Board that the call option was an illiquid security and that the Permanent Portfolio could hold no more than 10% of its assets in illiquid securities. Mr. Martin questioned Mr. Rolnick on the legality of the Fund doing a transaction with a personal client of the Fund’s adviser. (Tr. 555-56.) Mr. Rolnick, however, did not opine on the fairness of this transaction for the Fund, and there is no evidence that he negotiated the transaction on behalf of the Fund. Rather, Mr. Layman asked Mr. Coxon to prepare the first draft of the agreement because Mr. Coxon "had developed the idea of a warrant." (Tr. 2099.) Mr. Coxon, on the other hand, attributes the first draft of the document to Mr. Rolnick but admits that he and Mr. Layman’s counsel made changes. (Tr. 911.) Based on the evidence of record, I find that Mr. Coxon acted alone when he proposed the idea of an option to Mr. Layman and the Fund, when he negotiated on behalf of the Fund the terms of the option with Mr. Layman and his lawyer, and when as Fund Board chairman and president he advocated that the Fund enter the transaction Mr. Coxon has an unblemished disciplinary record as an investment adviser, and several of the witnesses opined on his honesty. I conclude that Mr. Coxon recommended making the option to his client, Mr. Layman, and purchasing the option to his adviser client, the Fund, because he considered it a win-win situation for both sides of the transaction.[31] Mr. Coxon’s subjective belief, however, does not change the fact that it was improper for him to act unilaterally as an adviser to the Fund on an issue in which he had a self-interest and about which he did not make full and complete disclosure to the Board. B. Section 12(b) of the ICA and Rule 12b-1 thereunder The Division charges that in calendar year 1990, Respondents caused the Fund to improperly charge its 12b-1 plan with: (i) accounting and auditing fees, transfer agent fees, custodian fees, printing and mailing expenses, and travel and entertainment expenses when the adviser had agreed to pay all the Fund’s operating expenses; and (ii) general partners’ and consultants’ fees that were not based on required written agreements approved by the Fund’s Board. (Div. Post-Hearing Brief at 48-53.) The Division alleges further that Respondents caused and aided and abetted the Fund’s failure to satisfy the requirement that the directors: (i) have sufficient information reasonably necessary to make an informed Board decision; and (ii) keep Board minutes that describe the factors it considered and the bases for its decisions. (Div. Post-Hearing Brief at 48-52.) Specifically, the Division charges that Respondents willfully caused and aided and abetted the Fund’s violation of Section 12(b) of the ICA and Rule 12b-1 thereunder by including the following "amounts disallowed" in the Fund’s 12b-1 plan in calendar 1990. Expense Amount allocated to Fund $ Amount disallowed $ Legal fees 33,308.44 General partner fees 63,000.00 63,000.00 Consulting fees 91,447.00 91,447.00 Printing and mailing 191,777.11 13,091.78 Printing prospectus 33,510.44 Accounting 38,661.96 38,661.96 Transfer agent fees 224,872.37 204,893.12 Registration fees 59,424.09 Allocable charges by 13,524.24 9,256.57 custodian Travel 50,066.98 41,383.71 Commissions 32,204.00 Expenses PP Info. 230,662.52 Total 1,062,459.15 461,734.14 (Div. Ex. 133.) This allocation does not mean the Fund paid or reimbursed the Adviser this amount. Determining the amount actually reimbursed requires reducing the above total by 50% and applying the 0.25% of net assets limit to the amount of expenses from each portfolio. (Tr. 1483-86; Div. Ex. 133 at 2.) In calendar 1990, Respondents charged the Fund’s 12b-1 plan $516,387. The Division challenges $214,270 of the expenses that the Adviser charged the Fund’s 12b-1 plan. (Tr. 1483-86; Div. Ex. 133 at 2.) Almost half the challenged amount, was incurred in connection with providing transfer agent services to existing customers. Ruling I will address the Division’s allegations with respect to Section 12(b) of the ICA and Rule 12b-1 thereunder in three separate findings. In the first finding, I will discuss the subject generally and then will deal specifically with transfer agent fees, custodian fees, auditing and accounting fees, and printing and mailing costs. The second finding will deal with travel and entertainment expenses. The last finding will resolve the issue of general partner fees, consulting fees, and the adequacy of the information WMM furnished the Board and the adequacy of the Board’s minutes. (1.) Transfer Agent Fees, Custodian Fees, Auditing and Accounting Fees, and Printing and Mailing Costs The Fund’s prospectuses dated May 31, 1989 and May 31, 1990, obligate the Adviser to pay "all of the Fund’s ordinary operating expenses." (Div. Exs. 19 at 12; 21 at 12.) The prospectuses define ordinary expenses as "charges by the Fund’s transfer fees, charges by the Fund’s custodian, accounting fees, auditing and legal fees not associated with registration or litigation, officer’s salaries and expenses, rent and occupancy, printing, postage and general administrative expenses." (Div. Exs. 19 at 12; 21 at 12.) The Division argues that the 1988 and 1990 advisory contracts incorporated this language from the prospectuses by reference. Thus, according to the Division, Respondents caused and aided and abetted the Fund’s violation of Section 12(b) and Rule 12b-1(a) thereunder when they improperly charged the Fund’s 12b-1 plan certain fees and expenses that the Adviser was obligated to pay. (Div. Post-Hearing Brief at 48-49, 52.) Respondents also refer to the language in the prospectuses that commits the Adviser to pay all ordinary operating costs, but emphasize the additional language that excepts from those expenses "the portion of marketing and promotional expenses described above." (Div. Exs. 19 at 12; 21 at 12.) Respondents contend that this language refers to all the expenses they charged to the Fund’s 12b-1 plan. (Resp. Post-Hearing Brief at 25.) Respondents argue that the Fund Board, including the disinterested directors, made a legitimate and reasonable policy decision to implement a very expansive definition of what constituted a marketing or distribution expense. For the following reasons, I disagree with Respondents and find that they caused and aided and abetted the Fund’s violation of Section 12(b) of the ICA and Rule 12b-1 thereunder. There are no prescribed standards as to what are appropriate promotional, distribution and advertising expenses chargeable under a Rule 12b-1 plan. (Tr. 1171-72.) When the Commission adopted Rule 12b-1 in 1980, it recognized "that new distribution activities may continuously evolve in the future, and in view of the impracticability of developing an all-inclusive list [of distribution expenses], the Commission maintains that the better approach is to define distribution expenses in conceptual terms (e.g., financing activities primarily intended to result in the sale of fund shares)." Bearing Distribution of Expenses by Mutual Funds, 21 SEC Docket at 333.[32] Generally accepted industry practice permits a fund board to determine what expenses are appropriately charged to a 12b-1 plan. (Tr. 57, 1149-51, 1161-62, 1171-72, 1226-27). See also Meyer v. Oppenheimer Management Corp., 707 F. Supp. 1394, 1399 (S.D.N.Y. 1988); Krinsk v. Fund Asset Management, Inc., 715 F. Supp. 472, 501 (S.D.N.Y. 1988).[33] An expansive, aggressive, and even an atypical approach to what is included in a fund’s 12b-1 plan does not necessarily violate Section 12(b) and Rule 12b-1. In discussing the mutual fund industry, Mr. Bobroff, the Division’s Rule 12b-1 expert, acknowledged, "[i]f you want to push the edge of the envelope . . . almost everything that we do has arguably some marketing aspect to it." (Tr. 1226.) Based on his experience and expertise, however, Mr. Bobroff found the Fund’s inclusion of transfer fees, auditors fees, custodial fees, printing of annual and semi-annual Fund reports, general partners fees, and consulting fees inappropriate in this situation.[34] (Tr. 1091-97, 1099-00.) Mr. Bobroff was "not aware, based upon [his] industry experience, of anyone ever including or determining to include a portion of custodial fees as a distributional-related expense activity." (Tr. 1092.) Moreover, Mr. Bobroff had never seen auditing expenses or Board members’ travel, especially foreign travel, charged as part of a distribution related expense. (Tr. 1089, 1100-01.) This arrangement was not a typical arrangement. In fact, about the only thing the parties agreed on was that the arrangements between the Adviser and the Fund were abnormal. There are very few funds where the adviser obligates itself to bear the fund’s normal operating expenses. (Tr. 1085-86.) Mr. Bobroff was unfamiliar with any similar advisory agreements where the Adviser committed to pay all the Fund’s ordinary operating expenses (and those operating expenses were defined in the effective prospectuses which were part of the registration), or where the 12b-1 plan contained a 50% matching provision, or where one agreement contained both the advisory agreement and the 12b-1 plan. (Tr. 1158-59, 1083, 1086.) The expert considered the 1988 and 1990 advisory agreements structurally flawed because the 50% matching provision under the 12b-1 plan created an incentive for the Adviser to classify expenses as marketing expenses, yet the Adviser was committed to pay all the Fund’s ordinary operating expenses which included many marketing expenses. (Tr. 1086, 1158, 1179-80.) Notwithstanding the atypical relationship that existed, I find that the following provisions in the Fund’s prospectuses and the advisory agreements in effect in 1990 made it unlawful for WMM to cause the Fund to include in its 12b-1 plan the items the prospectuses define as ordinary operating expenses. Prospectuses The Investment Adviser pays from its advisory fee at least one-half of all of the Fund’s promotional, distribution and advertising expenses. Such expenses include printing and mailing of prospectuses, brochures and other marketing material, registration and filing fees and related clerical and administrative expense. Each Portfolio of the Fund makes expenditures for promotion, distribution and advertising at an annual rate not to exceed 1/4 of 1% of the first $200 million of the Portfolio’s average daily net assets. A Portfolio makes no such expenditures with respect to its average net assets in excess of $200 million. As a further limitation, a Portfolio’s expenditures for promotion, distribution and advertising may not exceed the amounts for promotion, distribution and advertising incurred on its behalf by the Investment Adviser. . . . The Investment Adviser bears all of the Fund’s ordinary operating expenses (except for the comprehensive advisory fee, the portion of marketing and promotional expenses described above, and the fees and expenses of the Fund’s Independent Directors). Ordinary operating expenses include charges by the Fund’s transfer agent, charges by the Fund’s custodian, accounting fees, auditing and legal fees not associated with registration or litigation, officer’s salaries and expenses, rent and occupancy, printing, postage, and general administrative expense. (Div. Ex. 21 at 12.) (emphasis added) (Div. Ex. 19 at 11-12 contains almost identical language.) Advisory agreements The Investment Adviser agrees to pay, cause to be paid or reimburse the Fund for all its ordinary operating expenses during the period of this Contract . . . . (Div. Ex. 71 at 2.) It is a generally accepted principle of statutory construction with which the parties agree that specific provisions prevail over more general ones in matters of interpretation. (Resp. Post Hearing Brief at 26; Div. Post- Hearing Reply Brief at 9.) This rationale supports my finding that the specific definition of operating expenses in the prospectuses prevails over the advisory agreements’ statement that the Fund would pay the Adviser, up to certain limits, for "promotional, marketing, advertising and other expenses incurred in connection with the public distribution." (Div. Ex. 71 at Part IV.) In addition, it is well settled and compelling that investors have a right to rely on what they read in the prospectus. Manor Nursing Ctrs., 458 F.2d at 1098. The Division alleges that in calendar year 1990, the Fund, even allowing for charges allocable to new accounts, improperly charged its 12b-1 plan $204,893.12 in transfer agent fees, $38,661.91 in auditing and accounting fees, and $9,256.57 in custodian fees.[35] The Division also charges it was improper for the Fund to include a total of $13,091.78 in printing and mailing costs.[36] This latter total includes $7,510.85 attributable to the semi-annual reports and 25% attributable to printing and mailing annual reports to existing shareholders.[37] (Div. Post-Hearing Brief at 50.) The Division notes that the prospectuses define promotional and advertising or promotional, distribution, and advertising expenses to include "[the] printing and mailing of prospectuses, brochures and other marketing material." (Div. Exs. 19 at 11, 21 at 12.) It argues, however, that the costs of printing and mailing the Fund’s annual and semi-annual reports to existing shareholders was required by law and therefore cannot be considered marketing expenses includable in a 12b-1 plan. (Div. Post-Hearing Brief at 50.) Ruling The Fund’s effective prospectuses and advisory agreements specifically provide that WMM would pay "all [the Fund’s] ordinary operating expenses" and then define the aforementioned expenses to include transfer agent fees, custodial fees, auditing and accounting fees, and printing and mailing costs. I find that Fund violated Section 12(b) of the ICA and Rule 12b-1 thereunder by improperly including transfer agent fees, custodial fees, and auditing and accounting fees. In addition, because Section 12(b) and Rule 12b-1 thereunder require the Fund to provide annual and semi-annual reports to its existing shareholders, I find that it was improper for the Fund to include the associated printing and mailing costs in its 12b-1 plan as marketing expenses. I find further that Respondents caused and aided and abetted the Fund’s violations.[38] The facts establish that Respondents substantially assisted in the improper activities and they were either knowing or reckless participants. The knowledge or awareness requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or active participant. See Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990); IIT v. Cornfield, 619 F.2d 909, 922 (2d Cir. 1980). Mr. Coxon and Mr. Sergy are experienced securities professionals. They drafted the provisions of the prospectuses and advisory contracts that were structurally flawed. They chose not to seek an independent opinion on how to proceed, but instead advocated an aggressive policy of charging expenses to the Fund’s 12b-1 plan. At the very minimum, they acted recklessly. See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (en banc) (citations omitted). See also Robert D. Potts, 65 SEC Docket 1376, 1393 n.40 (Sept. 24, 1997). (2.) Travel and Entertainment Expenses The Division alleges that $41,383.71 of the $50,066.98 in travel and entertainment expenses included in the 12b-1 plan were improper because they related primarily to Mr. Coxon and Mr. Sergy’s expenses for attending Fund Board meetings. The Prospectuses define operating expenses to include "officer’s salaries and expenses." The advisory contracts, however, limit the commitment to pay all the Fund’s ordinary operating expenses by excepting, among other things, "[a]ll fees and expenses of directors who are not also officers of the Fund." (Div. Exs. 71 at 3; 72 at 4 (emphasis added).) The Division argues that this exclusion of the independent directors’ expenses "implies that all fees and expenses of the officer directors - such as Coxon and Sergy - are operating expenses that World Money Managers must pay." (Div. Proposed Findings of Fact and Conclusions of Law ¶ 26.) The Division also challenges the reimbursement to WMM by way of the 12b-1 plan for two trips made by Mr. Cuggino to California in 1990 when WMM was recruiting him from Ernst & Young. (Tr. 748-49; Div. Post-Hearing Brief at 50.) Ruling For the reasons already stated, I find that the statement in the effective prospectuses and the advisory agreements that the Adviser would pay "all of the Fund’s ordinary operating expenses" unambiguous when read in conjunction with the prospectuses’ definition of operating expenses. The inclusion of officers’ salaries and expenses in the latter definition made it a violation of Section 12(b) and Rule 12b-1 thereunder for the Fund to include all or part of those expenses in its 12b-1 plan in 1990. The advisory agreements’ prohibition against reimbursement to the Adviser of the salaries and expenses of disinterested directors supports this finding. Finally, it was clearly improper for the Fund to have included Mr. Cuggino’s recruitment expenses as a 12b-1 expense. For the reasons previously stated, I find that Respondents willfully caused and aided and abetted these Fund violations. (3.) General Partner Fees and Consulting Fees In 1990, the Fund’s 12b-1 plan included $63,000 in general partners fees and $91,447 in consulting fees. (Div. Ex. 133 at 3.) The general partner fees involved the actions of Mr. Coxon and represented 50% percent of the fees WMM owed Mr. Coxon. The consulting fees involved the actions of Mr. Sergy, Mr. Chandler, Mr. Smith, and Mr. Browne. The conculting fees represented 100% of the consulting fee WMM paid Mr. Brown; 85% of the consulting fee WMM paid Mr. Chandler and Mr. Smith, and 50% of the consulting fee WMM paid Mr. Sergy. (Div. Ex. 5; Tr. 710-11.) The Division on brief does not take issue with Respondents’ claim that that these fees were for marketing and distribution activities despite its expert’s testimony on this point. (Tr. 1094, 1096-97.) On brief, the Division alleges that it was wrong to include these expenses in the Fund’s 12b-1 plan because the Fund had not entered written contracts for these services as Rule 12b-1 requires. (Div. Post-Hearing Brief at 48; 51-52.) Ruling The evidence is that the Fund Board did not approve any written contracts for marketing services by the general partner or consultants. For example, Mr. Sergy admitted during the investigation that he had no written contact with the Fund or with WMM to provide services that would be covered by the Fund’s 12b-1 plan. (Tr. 722.) At the hearing, Mr. Sergy did not think he ever had a written agreement, but he could not remember. (Tr. 721-23.) Mr. Chandler’s testimony was that he arranged with Mr. Coxon the fees that he and Mr. Smith received. (Tr. 287-91.) Mr. Browne wrote Mr. Coxon a letter in 1987 referring to a $2,000 per month fee for consulting. However, the Division’s expert, Mr. Bobroff, was unable to find any executed consulting contract between the Fund or WMM and either Mr. Browne, Mr. Chandler, or Mr. Smith. (Div. Ex. 74; Tr. 1095-97, 1213-20.) Moreover, Mr. Bobroff was not aware of any written contracts between WMM and the Fund that covered marketing services provided by WMM’s general or limited partners - Mr. Coxon and Mr. Sergy. (Tr. 1099-100.) Mr. Bobroff found no contracts or agreements that documented what portion of the general partners’ fees were related to marketing. (Tr. 1195.) Accordingly, I find that the inclusion in the 12b-1 plan of the disputed portions of general partners fees and consulting fees violated the requirement of Section 12(b) of the ICA and Rule 12b-1 thereunder that all agreements with persons relating to implementation of the plan be in writing. Inclusion of the disputed general partner and consulting fees in the Fund’s 12b-1 plan also violated the advisory contracts’ requirements that the Fund Board and independent directors adopt and approve all agreements that caused the distribution of Fund monies pursuant to the 12b-1 plan and other safeguards that protected the Fund. (Div. Exs. 71 at 4; 72 at 6- 7.) I also find that the Fund violated the requirement of Section 12(b) and Rule 12b-1(d) thereunder that fund directors evaluate "such information as may reasonably be necessary to [make] an informed decision." The expert testimony is persuasive that the information and reports that Respondents furnished to the Board were "significantly inadequate" for the Board to make an informed judgment as to whether material expenses could properly be included as distribution or marketing expenses. (Tr. 1104-08, 1173, 1175-76.) Mr. Bobroff’s critique of the information the Board considered specifically referred to the lack of supporting data which the Board could use to assess the fairness and reasonableness of expenses charged and paid to WMM’s affiliates. (Tr. 1117-18.) Mr. Bobroff also questioned the reasonableness of the percentage allocations in several of the enumerated expense categories. (Tr. 1106-07, 1192-93.) In Mr. Bobroff’s expert opinion, the materials that the Board used in its decision-making contained no support for WMM’s allocation. (Div. Ex. 5; Tr. 1193.) I reject as unsupported Respondents’ defense that Mr. Bobroff was unaware of information conveyed to the Board orally. In addition to Mr. Bobroff’s persuasive expert testimony on deficiencies in information presented to the Board, at least one independent director, who was very supportive of Respondents, admitted being unaware of material information concerning a significant matter that the Board considered. Mr. Martin was surprised by and unaware of the details concerning WM Securities. (Tr. 307. 327-330) Respondents did not inform Mr. Martin that the NASD required a broker-dealer to have a registered financial principal to engage in the business activities planned for the Fund’s broker-dealer, and that Mr. Coxon, Mr. Sergy, and Mr. Chandler, who were to be the broker-dealer’s officers and directors, were not licensed financial principals. (Tr. 308.) Mr. Martin was also unaware that WM Securities had entered into a five-year lease for space adjoining WMM until he made a surprise visit to Petaluma in 1994. (Tr. 394.) The Fund Board was not asked to consider the lease before it was executed. (Tr. 402.) Rule 12b-1(d) requires that board minutes describe "the factors considered and the basis for the decision to use company assets for distribution." When it issued Rule 12b-1 in 1980, the Commission explained that, as an alternative to prescribing a checklist that the directors had to consider, it was requiring preservation of detailed minutes. However, in order to insure a proper record of the deliberative process, the rule will require the preservation of minutes. Since corporate minutes are typically cryptic, the rule requires explicitly that these minutes set forth the factors the directors considered, together with an explanation of the basis for the decision to use fund assets for distribution. Bearing of Distribution Expenses by Mutual Funds, 21 SEC Docket at 335. The Fund minutes contain conclusions with little or no discussion of what factors the Board considered and the basis on which it made its decision. (Tr. 1175-76.) I find therefore that the Fund violated Section 12(b) of the ICA and Rule 12b-1(d) thereunder because the Fund did not make and preserve minutes as the Rule requires. For the reasons previously stated, I find that Respondents willfully caused and aided and abetted these Fund violations C. Section 13(a)(3) of the ICA The Division charges that the Respondents caused the Fund’s Permanent Portfolio to violate its fundamental policy that limited its "aggressive growth" holdings to stocks and "stock warrants" by having the Fund buy the Symantec call option. Ruling Section 13(a)(3) of the ICA prohibits a registered investment company from deviating from any investment policy recited in its registration statement without authorization from a majority of its shareholders.[39] The Permanent Portfolio’s prospectus dated May 31, 1989, represents that its investment policies and objectives were fundamental and can only be changed by a majority of shareholders. (Div. Ex. 19, 7.) The prospectus also states that 15% of the portfolio’s assets would be invested in "[s]pecially selected U.S. stock market investments," including: stock warrants and common stocks that are more volatile than the stock market as a whole, such as stocks of companies in high technology industries, companies developing or exploiting new products or services, and companies whose shares are valued primarily for their appreciation potential.[40] (Div. Ex. 19, 7.) The parties agree that a warrant is a type of option. (Resp. Post-Hearing Brief at 52.) All options, however, are not warrants. The description has significant ramifications. For example, the Fund’s SAI dated May 31, 1989, discussed its policy with respect to option transactions which is markedly more restrictive than for warrants. (Div. Ex. 20, 11-13.) I find that the Fund’s transaction with Mr. Layman involved an option rather than a warrant. My finding is based partially on testimony by the Division’s expert, Robert E. Connor. Mr. Connor defined an option as an instrument representing the right of the owner to effectively buy an underlying instrument or security at a specified price. (Tr. 992.) Mr. Connor rejected Respondents’ position that the Symantec transaction was a warrant for a number of reasons I find persuasive: (i) it was being issued by an individual and not the Symantec corporation; (ii) it did not involve the issuance of additional Symantec shares; (iii) it was not being used to reduce the corporation’s cost of capital; and (iv) a warrant would not contain a provision allowing the maker to avoid giving stock in the event the holder elects to exercise the option. (Tr. 994-96.) I take official notice of the following definitions in John Downes & Jordan Elliot Goodman, Barrons Dictionary of Finance and Investment Terms, (4th ed. 1995): Option - Securities: securities transaction agreement tied to stocks, commodities, or stock indexes. Call Option: a call option gives its buyer the right to buy 100 shares of the underlying security at a fixed price before a specified date in the future - usually three, six, or nine months. For this right, the call option buyer pays the call option seller, called the writer, a fee called a premium, which is forfeited if the buyer does not exercise the option before the agreed-upon date. . . . In practice, most . . . options are rarely exercised. Instead, investors buy and sell options before expiration, trading on the rise and fall of premium prices. Subscription Warrant: type of security, usually issued together with a bond or preferred stock, that entitles the holder to buy a proportionate amount of common stock at a specified price, usually higher than the market price at the time of issuance, for a period of years or in perpetuity; better known simply as a warrant. . . . A warrant is usually issued as a sweetener, to enhance the marketability of the accompanying fixed income securities. Respondents’ expert, Mr. Cadden, testified that he considered the instrument a warrant because since the mid-1980s new instruments called third-party warrants have obliterated the traditional distinctions referred to by Mr. Connor. (Tr. 2164- 67.) However, in 1990 when Mr. Coxon proposed the option to Mr. Layman and presented it to the Fund Board with Mr. Sergy, they did not know what Mr. Cadden testified to in 1997. There is no question that in 1990 Mr. Coxon and Mr. Sergy believed this transaction to be an option. (Tr. 2305.) In 1976, Mr. Coxon authored an informational pamphlet, Using Warrants: Safe Investment Programs Using Stock Warrants in Dual-Purpose Funds, wherein he noted many of the same distinguishing characteristics between warrants and options that Mr. Connor mentioned. (Div. Ex. 142; Tr. 886-88.) Applying those criteria to the Symantec instrument clearly results in a finding that the instrument is an option. In addition, in a January 17, 1990 letter to Mr. Martin, Mr. Coxon described the Symantec instrument as a "call option" on three occasions, and in a calculation of the financial and tax benefits described the transaction as an option. (Div. Ex. 107.) Furthermore, Mr. Coxon referred to the transaction as a "long term deep-in-the-money call option" when he raised the issue at the Fund Board meeting on January 27, 1990. (Div. Ex. 44; Tr. 904-06.) Mr. Rolnick also characterized the transaction as an option at that same meeting. Finally, Mr. Sergy authored the Board minutes in which the term option is consistently used to describe the transaction at issue. (Div. Ex. 44.) For all these reasons, I conclude that the Fund departed from its fundamental investment objectives and thus violated Section 13(a)(3) of the ICA when it agreed to acquire from Mr. Layman an option to purchase 22,500 shares of Symantec without first obtaining Fund shareholder approval. I further conclude that Respondents willfully caused and aided and abetted these Fund violations D. Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 34(b) Of The ICA In view of the Permanent Portfolio’s purchase of the Symantec option on April 6, 1990, the Division charges that Respondents willfully violated the antifraud provisions of the securities statutes and rules enumerated above by causing the Fund’s prospectus dated May 31, 1989 to represent falsely that the Permanent Portfolio’s "[s]pecially selected U.S. stock market investments include stocks warrants and stocks," and the Fund’s prospectus dated May 31, 1990, to represent falsely that the Permanent Portfolio’s "[a]ggressive growth stocks include stocks warrants and stocks." (Div. Exs. 19 at 7; 21 at 7.) The Division charges Respondents committed additional antifraud violations by causing the Fund to misrepresent in both prospectuses that WMM was responsible for payment of the Fund’s transfer agent fees and auditing fees. (Div. Exs. 19 at 12; 21 at 12.) The Division claims the latter statement is false because in calendar 1990 WMM charged the Fund’s 12b-1 plan $224,872.37 in transfer agent fees, $34,500 in auditing fees, and $12,130 in auditing fees for WMM. (Div. Post-Hearing Brief at 60.) The Division also alleges that Respondents violated the antifraud provisions because they caused the Fund’s SAI dated May 31, 1991 to state that "the Permanent Portfolio incurred distribution expenses of $215,650 during its last fiscal year, of which $203,223 [was] spent on advertising and $12,427 [was] spent on printing and mailing of prospectuses to other than current shareholders." (Div. Ex. 24 at 14.) The Division charges this was a material misrepresentation to shareholders and potential shareholders because it concealed other significant expenses included in the 12b-1 plan such as transfer agent fees, auditing fees, general partner fees, et cetera. (Div. Ex. 133 at 3; Div. Post-Hearing Brief at 62.) Respondents’ claim that these allegations are "a restatement of the Division’s prior argument and fail[] for the same reason, i.e., the expenses charged to the Fund under the Marketing Plan had a marketing aspect, component or purpose, and thus were properly characterized as marketing or advertising costs . . . the Division also presented no evidence or argument that this alleged misrepresentation would be material to an investor." (Resp. Post-Hearing Brief at 81-82.) Ruling Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange, in connection with the offer, purchase, or sale of any security: (i) to employ any device, scheme, or artifice to defraud; (ii) to make any untrue statement of a material fact or to omit to state a material fact necessary not to mislead; or (iii) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 34(b) of the ICA makes it unlawful for: (i) any person to make any untrue statement of material fact in any registration statement, application, report, account, record or other document transmitted, filed or retained as required by law; and (ii) any person filing, transmitting or keeping any such document to omit to state in it any fact necessary in order to prevent the statements made from being materially misleading. Previous portions of this decision detail several false representations made by the Fund in its prospectuses and SAIs prepared by WMM, acting through Mr. Coxon and Mr. Sergy. I refer specifically to the findings concerning representations by the Fund that: (i) WMM paid all transfer agent fees, custodian fees, auditing fees, and printing and mailing costs; and (ii) that the Permanent Portfolio’s aggressive stock holdings consisted of stocks and stock warrants. I find that by these actions and representations Respondents violated the antifraud provisions of the securities statutes. Mr. Coxon and Mr. Sergy knew when they recommended charges to the Fund’s 12b-1 plan in calendar 1990 that the Fund’s relevant prospectuses and Advisory Contracts represented that the Adviser paid all these Fund operating costs. Mr. Coxon and Mr. Sergy knew when they drafted and /or reviewed the Fund Prospectus dated May 31, 1990, that it was false to state that the Permanent Portfolio’s investments consisted of stocks and stock warrants because the Portfolio had purchased a "deep-in-the-money call option" from Mr. Layman on April 6, 1990. In addition, Respondents caused the Fund to report inaccurately expenditures that were included in its 12b-1 plan. The Fund’s SAI dated May 31, 1991, was misleading because it reported the Permanent Portfolio’s advertising fees of $203,223 in the previous fiscal year but it did not mention significant other expenses charged to the 12b-1 plan such as transfer agent fees totaling $224,873, and it omitted consulting fees, general partners’ fees, and other items. (Compare Div. Ex. 24 at 14 with Div. Ex. 133 at 3.) A person must act with scienter to violate Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.[41] Scienter can be established by showing that Respondents acted intentionally or recklessly.[42] Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982). I find that Mr. Coxon and Mr. Sergy acted with scienter. They are both well educated, experienced securities professionals. The evidence is persuasive that they acted deliberately, intentionally and/or recklessly to accomplish the activities that resulted in these material misrepresentations or omissions. The false information or omissions were material because there is a substantial likelihood that a reasonable investor would consider the Fund’s assets and expenses significant in making an investment decision. See Basic v. Levinson, 485 U.S. 224, 231-32 (1988) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). For all these reasons, I find that Respondents willfully violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that Mr. Coxon and Mr. Sergy violated Section 34(b) of the ICA.[43] E. Section 10(b) of the ICA The Division charges that Respondents willfully caused and aided and abetted the Fund’s violation of Section 10(b) of the ICA. Section 10(b)(2) prohibits an investment company from using the services of a principal underwriter where a majority of the registered investment company’s directors are "interested persons" of that underwriter. The Division alleges that half of the Fund’s directors were "interested persons" of the Fund’s principal underwriter, WM Securities, because Mr. Sergy was a director and officer of both the Fund and WM Securities, and Mr. Coxon was a Fund officer and director and "functionally participated" in the management of WM Securities after he ceased being an officer and director. (Division’s Post-Hearing Brief at 5.) Ruling The Fund used WM Securities as a broker-dealer and principal underwriter from December 1989 until it liquidated WM Securities in 1996. From December 1989 until Leonard Radomile resigned on August 14, 1990, the Fund had three independent directors on a five person Board. (Tr. 2019.) The disinterested director position that Mr. Radomile resigned on August 14, 1990, was not filled until the spring or summer of 1992. (Tr. 2020-28.) Throughout the period at issue, Mr. Sergy was a director and officer of the Fund and a director and officer of WM Securities. (Tr. 958-59.) Mr. Coxon was a director and officer of the Fund and an officer and director of WM Securities from December 1989 until August 14, 1990. (Tr. 863, 2272; Resp. Ex. 573.) The evidence is that Mr. Coxon controlled WM Securities even after he resigned as an officer and director. Mr. Sergy testified during the investigation:[44] Q. Since Mr. Coxon resigned as an officer of World Money Securities, has his role changed in any way? Did he still do the same things that he did while he was treasurer? A. I would say for the most part, yes. Again, I look at him as president of a parent, and while he doesn’t have any seat on the board, he speaks, we listen. (Tr. 866.) I reject Respondents’ argument that Mr. Coxon could only be considered an interested person of WM Securities after he resigned his official positions, if he were an employee of WM Securities. (Resp. Post-Hearing Brief at 77 n.31.) The record contains overwhelming evidence that Mr. Coxon created WM Securities and controlled its operations throughout its existence. The statutory definition of "interested person" supports the Division’s position that Mr. Coxon’s control of WM Securities made him an "interested person" as that term is used in Section 10(b)(2) of the ICA. (See Section 2(a)(19) of the ICA; Div. Post-Hearing Brief at 63.) For these reasons, I find that Mr. Coxon was an interested person of both the broker-dealer and the Fund. Therefore, from August 14, 1990 until the spring or summer of 1992, half of the Fund’s directors were also interested persons of the Fund’s principal underwriter, and thus the Fund violated Section 10(b)(2) of the ICA as alleged. For the reasons stated previously, I find further that Mr. Coxon and Mr. Sergy knowingly and willfully caused and aided and abetted the Fund’s violation. F. Section 17(d) of the ICA and Rule 17d-1 thereunder Section 17(d) of the ICA provides: It shall be unlawful for any affiliated person of or principal underwriter for a registered investment company (other than a company of the character described in section 12(d)(3)(A) and (B)), or any affiliated person of such person or principal underwriter, acting as a principal to effect any transaction in which such registered company, or a company controlled by such registered company, is a joint or a joint and several participant with such person, principal underwriter, or affiliated person, in contravention of such rules and regulations as the Commission may prescribe for the purpose of limiting or preventing participation by such registered or controlled company on a basis different from or less advantageous than that of such other participant. Rule 17d-1(a) thereunder specifies that: No affiliated person of or principal underwriter for any registered investment company . . . and no affiliated person of such a person . . . shall participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement . . . in which any such registered company, or a company controlled by such registered company, is a participant . . . unless an application regarding such joint enterprise, arrangement or profit sharing plan has been filed with the Commission and has been granted by an order entered prior to the submission of such plan . . . . The Division charges that WMM willfully violated Section 17(d) of the ICA and Rule 17d-1 thereunder, and that Mr. Coxon and Mr. Sergy caused and aided and abetted the violations by having affiliated companies enter two joint arrangements without first obtaining an exemptive order from the Commission. The first joint arrangement was the Selling Agreement among WMM, the Fund, and WM Securities entered in 1990 and renewed in 1991. WM Securities agreed to offer and sell shares of the Treasury Bill Portfolio and Aggressive Growth Portfolio and WMM agreed to pay WM Securities commissions over the next six and a half years. The second joint arrangement was the 1993 Passport Agreement among WMM, WM Securities, and Passport Financial, a WMM subsidiary. WM Securities advanced Passport Financial $39,000 to defray underwriting costs and WMM agreed to reimburse WM Securities up to $40,000 if the Passport Financial offering did not close Respondents claim that the Division has not met its burden of proof. They note that neither the OIP nor any hearing exhibit or witness mentioned the issue of joint arrangements. They dispute the Commission’s assertion that no exemption was ever sought, and contend that Mr. Rolnick advised WM Securities that the above selling agreements were exempt from Section 17(d). (Resp. Ex. 664.) Ruling Section 17(d) and Rule 17d-1(a) thereunder are intended to prohibit transactions by which affiliates take advantage of investment companies. "Section 17(d) is one of the 1940 Act’s provisions designed to prevent, or at least limit, abuses resulting from conflicts of interest. . . . Congress authorized the SEC . . . to prohibit transactions in which affiliates are involved to the detriment of their investment companies." 2 Frankel supra, 514. I reject Respondents’ reliance on counsel defense for the reasons stated earlier and because Mr. Rolnick’s memorandum which Respondents rely on does not mention this issue. (Resp. Ex. 664; Div. Reply Brief at 20.) Additionally, in view of Section III.AJ.-AK. of the OIP, I reject Respondents’ position that the OIP did not raise the issue of a potential violation of Section 17(d) and Commission Rule 17d-1. I find that WMM willfully violated Section 17(d) of the ICA and Rule 17d-1(a) thereunder because the undisputed evidence is that it and several affiliated companies entered into transactions which on their face are not permitted without an exemption from the Commission. Respondents did not receive or even seek the required exemption. I find further that Mr. Coxon and Mr. Sergy willfully caused and aided and abetted the violations because they initiated the wrongful acts and signed the documents on behalf of the affiliated entities. III. SANCTIONS A consideration in determining what sanctions are appropriate against is the U.S. Court of Appeals’ decision in Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996) In Johnson, the court struck down a Commission ordered censure and six-month suspension from industry participation based on its finding that the term "penalty" used in 28 U.S.C. § 2462 "is a form of punishment imposed by the [Commission] for unlawful or proscribed conduct, which goes beyond remedying the damage caused to the harmed parties by the [Respondent’s] action."[45] Johnson, 87 F.3d at 488. The Division attempts to distinguish Johnson by arguing that the Johnson court essentially concluded that the Commission had failed to create a record for the exercise of its discretion. (Div. Post-Hearing Brief at 66-69.) The implication being that an affirmative finding that these Respondents pose an on-going threat to the public would make Johnson and Section 2462 inapplicable here. The Division’s argument is interesting but inapplicable. The ruling of Johnson is unambiguous. The Commission cannot impose a penalty for activities that occurred prior to January 13, 1992, that is five years before the Commission initiated a proceeding. Johnson does not prohibit cease and desist orders or disgorgement orders based on conduct beyond the five year statute of limitations since these are remedial measures and they do not come within the definition "civil fine, penalty, or forfeiture, pecuniary or otherwise." Johnson, 87 F.3d at 491-92. The Division requests that Respondents be subject to a wide array of sanctions. It would bar WMM as an investment adviser. It would bar Mr. Coxon from association with an investment adviser and an investment company with a right to reapply after one year, and it would suspend Mr. Sergy from association with an investment adviser and an investment company for six months. (Div. Post-Hearing Brief at 76-77.) In addition, the Division recommends entry of a cease and desist order, an order requiring disgorgement, and an order requiring civil penalties. A. Participation in the Industry Where there has been a willful violation of the statute and it is in the public interest to do so, Section 203(e) of the Advisers Act provides that the Commission "shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding twelve months, or revoke the registration of any investment adviser."[46] Sections 203(f) of the Advisers Act authorizes the Commission to impose similar sanctions on persons associated with an investment adviser. Section 9(b) of the ICA gives the Commission additional authority.[47] Based on my findings that Respondents have violated the securities statutes, it is necessary to next consider what, if any, sanction is in the public interest. The following considerations are applicable to that determination: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). Respondents’ violations were egregious because they involved substantive, as opposed to technical, provisions of the securities statutes that are basic to investor protection - breach of fiduciary duties, accurate disclosure in the prospectus, and prohibitions against fraud and misrepresentation. The violations evidenced a pattern of behavior over an extended period that showed a complete disregard for the distinction between the interests of public shareholders and Respondents’ self-interest. Mr. Coxon and Mr. Sergy acted with a high degree of scienter. They are both experienced securities professionals who accomplished their objectives in ways that simultaneously violated accepted norms of behavior in the mutual fund industry and ignored "red flags" indicating the existence of potential problems.[48] For instance, Mr. Coxon and Mr. Sergy chose to ignore Mr. Cuggino’s warning about the risks of aggressive accounting in connection with the Fund’s 12b-1 plan. Mr. Cuggino’s admonition raised a "red flag" about the legality of the actions Mr. Coxon and Mr. Sergy were advocating. Furthermore, there is no evidence that Respondents ever sought an objective opinion concerning the legality of any of the multiple activities that are the subject of this decision. The contention that in-house counsel to the Fund and WMM was fully informed and rendered legal opinions on these matters is unpersuasive. Mr. Coxon’s belief in his views and abilities is so unshakable that he does not understand why there should be concern. Mr. Coxon adheres to this position despite the possibility for conflicts of interest and self-dealing where he is the investment adviser to the Fund and an individual on opposite sides of the same transaction. He saw no reason to inform the independent directors of significant terms of the Symantec option, and he did not seek their approval of the final agreement. Mr. Coxon and Mr. Sergy do not acknowledge any wrongful conduct and seem to view the proceeding as an unnecessary intrusion in their business affairs. Based on my observation of the Respondents and after hearing them express their firmly held beliefs in the correctness of their actions, I find that a strong sanction will be necessary to prevent a recurrence and to effect a remedy. WMM has been a registered investment adviser since 1982, and Mr. Coxon and Mr. Sergy have been registered investment advisers and registered representatives since the mid-1970s. The fact that Respondents have no prior disciplinary history is a significant mitigating factor. Finally, the holding in Johnson prohibits any penalty for wrongful conduct that occurred prior to January 13, 1992. Numerous illegal activities, however, occurred after that date. Respondents’ actions in connection with the joint agreement among WMM, WM Securities, and Passport in 1993 and 1994 whereby WM Securities lost funds it advanced to Passport to cover underwriting expenses violated Section 206(2) of the Advisers Act and Section 17(d) of the ICA and Rule 17d-1 thereunder. Respondents violated Section 13(a)(3) of the ICA in 1992 because the Fund’s prospectus dated May 29, 1992, represented that the Permanent Portfolio’s "[a]ggressive growth stocks include[d] stock warrants and stocks" when the portfolio held the Symantec option. (Div. Ex. 25 at 3.) Lastly, Respondents violated Section 10(b)(2) of the ICA from January 13, 1992 until 1996, because during this period 50% of Fund’s board members were also interested persons of WM Securities, the Fund’s principal underwriter. Based on all the considerations mentioned, I find it in the public interest to suspend the registration of WMM for three months. I find further that it is in the public interest to suspend Mr. Coxon and Mr. Sergy from association with a registered investment adviser and from association with an investment company for a period of three months. I do not distinguish between Mr. Coxon who initiated the unlawful activities and Mr. Sergy who helped carry them out because the preponderance of the evidence is that despite differing roles they both participated totally in the violations. B. Cease and Desist Section 8A of the Securities Act, Section 21C of the Exchange Act, Section 203(k) of the Advisers Act and Section 9(f) of the ICA provide that the Commission, may, after notice and opportunity for hearing, require a person found to have violated any provision, rule, or regulation of the securities laws "to cease and desist from committing or causing such violation and any future violation of the same provision, rule or regulation." Respondents have violated various provisions of the securities laws and rules thereunder. I find it appropriate and in the public interest to exercise the authority specified, and to order Respondents to cease and desist from committing or causing these violations and any future violations.[49] C. Disgorgement Section 8A(e) of the Securities Act, Section 21C(e) of the Exchange Act, Sections 203(j) and 203(k)(5) of the Advisers Act, and Sections 9(e) and 9(f)(5) of the ICA provide that "the Commission may enter an order requiring accounting and disgorgement, including reasonable interest."[50] Disgorgement is a remedial measure equitable in nature. Its purpose is "to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws." SEC v. First City Financial Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989.) The Division recommends that Respondents be ordered to disgorge a principal amount of $1,742,768.66, plus $1,329,837.70 in prejudgment interest based on the benefits they received as a result of the following violations:[51] 1. Section 206(2) of the Advisers Act (a.) $134,751.18, or half of the transfer agent fees and auditing fees[52] that Respondents improperly charged the 12b-1 plan in calendar 1990, plus prejudgment interest from January 1991 through May 1997 of $93,112.18; (b.) $182,005 in printing costs that Respondents had WM Securities pay for the Treasury Bill Portfolio and Aggressive Growth Portfolio in calendar 1990 plus another $154,566 in such costs for calendar 1991. Thus, a principal disgorgement amount of $336,571 plus prejudgment interest of $207,788.66 through May 7, 1997;[53] (c.) $52,137, or three-fourths of the rent that Respondents had WM Securities pay from January 1, 1992 through December 31, 1995 for "an office and common area" used by the Fund, WMM, and Bullion Security Corp., as well as WM Securities; and (d.) $20,289 for the amount WM Securities lost as a result of the Passport Agreement, plus prejudgment interest of $6,521.72. 2. Section 12(b) of the ICA and Rule 12b-1 thereunder (a.) $214,269.30 for reimbursements Respondents improperly obtained in calendar 1990 that either violated the 1988 Advisory Contract or lacked the requisite written approval of the Fund Board, with prejudgment interest from January 1991 through May 1997 of $148,058.70. (Div. Ex. 133.) 3. Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the ICA (a.) $134,751.18, or half of the transfer agent fees and auditing fees[54] that Respondents improperly charged the Fund’s 12b-1 plan in calendar 1990, for the false representations in the Funds’ 1989 and 1990 prospectus stating that it paid all operating costs, including transfer agent fees and auditing fees. The Division also requests disgorgement of prejudgment interest from January 1991 through May 1997 of $93,112.18. 4. Section 17(d) of the ICA and Rule 17d-thereunder (a.) $850,000 in excessive capitalization provided to WM Securities, plus prejudgment interest of $781,244.27 from November 1989 through May 1997. Respondents argue that the Division’s disgorgement demand is flawed for many reasons: (1) there has been no showing that Respondents were unjustly enriched; (2) the Fund Board approved each transaction except the WM Securities lease agreement; (3) the realized benefits were not unjust as there were compelling business reasons for the challenged activities; and (4) the Division’s calculations are inconsistent and unsupported by the evidence. (Resp. Post-Hearing Brief at 87-91.) Ruling The case law is emphatic that the investment adviser industry is replete with opportunities for self-dealing and that Congress intended the Advisers Act to be construed flexibly to effect its remedial purpose. Capital Gains, 375 U.S. at 195. Moreover, the courts have noted "[t]he effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable." Manor Nursing Ctrs., 458 F.2d at 1104. The equities in this situation clearly lie with the Fund shareholders because the result of all the violations for which the Division seeks disgorgement was that monies were taken from the Fund improperly. I find Respondents’ several defenses unpersuasive. The preponderance of the evidence is that the Adviser, and its owners, Mr. Coxon, a general partner, and Mr. Sergy, a limited partner, used the Fund to benefit themselves. The evidence is not that they used funds for lavish personal expenses, rather they used the Fund’s resources to accomplish marketing efforts and new ventures which Mr. Coxon believed held business potential. Nevertheless, the interests of the Fund’s shareholders was secondary, if they were considered at all. For the reasons previously stated, the business judgment rule does not immunize Respondents’ actions. In addition, the persuasive and uncontested expert evidence, supported by the testimony of the independent directors, is that the information Mr. Coxon and Mr. Sergy provided the Fund Board was insufficient for informed decision-making. Thus, Board approval of many of the transactions was meaningless.[55] The record does not support Respondents’ claim that there were compelling business reasons for the challenged activities. Nonetheless, it would not make any difference because the actions were illegal. For all these reasons, I find disgorgement appropriate in this situation. Respondents offered little to support their charge that the Division’s disgorgement calculations are inconsistent and unsupported by the evidence. (Resp. Post- Hearing Brief at 87-88.) It is well settled that once the government presumptively shows that its disgorgement figure reasonably approximates the amount of unjust enrichment, the burden shifts to the respondent to "clearly" demonstrate that the disgorgement figure was not a reasonable approximation. SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996); SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995); First City, 890 F.2d at 1232. Any risk of uncertainty as to the disgorgement amount "should fall on the wrongdoer whose illegal conduct created the uncertainty." First City, 890 F.2d at 1232 (citations omitted). Furthermore, the "gains" targeted for disgorgement need not be limited to "profits"; they may include all illegal payments received. SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985); see also Great Lakes Equities Co., 775 F. Supp. 211, 214 (E.D. Mich. 1991) (the benefit or unjust enrichment of a respondent includes not only what it gets to keep in its pocket after the fraud, but also the value of the other benefits the wrongdoer receives through the scheme). I find that the government has made such a showing. Accordingly, I will order WMM, Mr. Coxon, and Mr. Sergy to disgorge the principal amount of $1,608,018, with prejudgment interest of $1,236,726. I deducted $134,751.18 and corresponding prejudgment interest of $93,112.18 from the amount the Division requested because the violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the ICA did not result in the improper transfer of funds from the Fund or unjust enrichment to Respondents. D. Civil Money Penalties Section 21B of the Exchange Act, Section 9(d) of the ICA, and Sections 203(i) of the Advisers Act authorize the Commission to assess civil money penalties where it is in the public interest to do so against any person if it finds that person willfully violated or willfully aided and abetted a violation of the securities laws or rules thereunder, or has willfully made or caused to be made in any registration or report filed with the Commission a material false or misleading statement or has omitted to state a material fact. It is necessary not only to find that a civil penalty is in the public interest, but that the particular amount of the penalty serves that purpose also. New Allied Development Corp., 63 SEC Docket 807, 821 (Nov. 26, 1996) (citing First Securities Transfer Systems, Inc., 60 SEC Docket 441, 447 n.15 (Sept. 1, 1995)). The factors to be considered in determining whether it is in the public interest to assess a penalty are (i) whether the illegal activities involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; (ii) the harm caused to other person(s); (iii) the extent to which any person was unjustly enriched; (iv) a person’s prior disciplinary history; (v) deterrence; and (vi) such other matters as justice may require. The Division has requested assessment of the following civil penalties:[56] 1. Section 206(2) of the Advisers Act (a.) Second tier penalties of $250,000, $50,000, and $10,000 against WMM, Mr. Coxon, and Mr. Sergy, respectively, for each violation of Section 206(2) of the Advisers Act for deceitful conduct in causing WM Securities to pay all office rents from January 1992 through December 1995. I deny the request because I found that Respondents violated Section 206(2) of the Advisers Act on May 28, 1991, when they caused the Fund to enter the five-year lease. Johnson does not permit the assessment of a penalty for a violation that occurred before January 13, 1992. I made no findings about the legality of lease payments made in 1992 through 1995 because there were no allegations that the payments in these years were illegal. (b.) Second tier penalties of $250,000, $50,000, and $10,000 against WMM, Mr. Coxon, and Mr. Sergy, respectively, for each violation of Section 206(2) of the Advisers Act for deceitful conduct in having WM Securities advance up to $40,000 of Passport’s offering expenses and ultimately absorb about half those costs during 1993 and 1994. I find a penalty is in the public interest because Respondents’ willful violations were serious breaches of the fiduciary duty they owed the Fund, and it is necessary to deter them and others from similar conduct. I find it appropriate to assess second tier penalties because Respondents’ violation of Section 206(2) of the Advisers Act involved fraudulent conduct and a deliberate disregard for applicable regulatory requirements. However, maximum second tier penalties are excessive considering that the Fund lost $20,289, and Respondents have no history of prior violations. (Div. Ex. 99, 10.). I will order WMM, Mr. Coxon, and Mr. Sergy to pay second tier penalties of $50,000, $10,000, and $10,000, respectively. 2. Section 13(a)(3) of the ICA (a.) First tier penalties of $50,000, $5,000, and $2,500 against WMM, Mr. Coxon, and Mr. Sergy, respectively, for violating Section 13(a)(3) of the ICA from January 13, 1992 to the present by holding a call option of Symantec common stock in violation of a fundamental policy of the Permanent Portfolio. I found that Respondents violated Section 13(a)(3) of the ICA based on representations in the Fund’s prospectus dated May 31, 1989. The prospectus reveals that the Fund made an unauthorized departure from its fundamental investment objectives on April 6, 1990, when the Permanent Portfolio bought an option to purchase 22,5000 shares of Symantec for $329,4000. The Division’s request for the imposition of civil penalties resulting from the purchase of the Symantec call option is based on the Fund’s continued holding of the Symantec option and, presumably, subsequent misrepresentations in later Fund prospectuses. I deny the request because I did not make specific findings of illegality after January 13, 1992, and it appears that the Division is seeking to circumvent the limitations imposed by Johnson. 3. Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 34(b) of the ICA (a.) Second tier penalties of $250,000 $50,000, and $10,000 against WMM, Mr. Coxon, and Mr. Sergy, respectively, for each violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Section 34(b) of the ICA for falsely representing in the Fund’s Prospectuses from January 13, 1992 to the present that the Permanent Portfolio’s "aggressive stock" holdings involved or would involve stocks and stock warrants, and by falsely representing the nature of the Permanent Portfolio’s 12b-1 reimbursement in the May 31, 1991 SAI. I deny the Division’s request because I found that Respondents violated these antifraud provisions because of false statements made in: (i) the Fund’s Prospectuses dated May 31, 1989 and May 31, 1990; and (ii) the Fund’s SAI dated May 31, 1991. I made no findings about the contents of later Prospectuses or SAIs. Johnson does not permit the assessment of a penalty for a violation that occurred before January 13, 1992. 4. Section 17(d) of the ICA and Rule 17d-1 thereunder (a.) Second tier penalties of $250,000, $50,000, and $10,000, against WMM, Mr. Coxon, and Mr. Sergy, respectively, for the violation of Section 17(d) of the ICA and Rule 17d-1 thereunder during 1993 and 1994 for having WM Securities enter into a joint arrangement with WMM and Passport to underwrite Passport shares without obtaining an exemption from the Commission. I found that Respondents violated Section 17(d) of the ICA and Rule 17d-1 thereunder in connection with the 1990 and 1991 Selling Agreements among WMM, the Fund, and WM Securities, and in connection with the 1993 Passport Agreement among WMM, WM Securities and Passport. Both agreements involved joint arrangements among affiliates for which no exemption had been obtained from the Commission. Johnson does not permit the assessment of a penalty for the violation in connection with the Selling Agreements because the violations occurred before January 13, 1992. Johnson does not affect the 1993 Passport Agreement. I find that it is in the public interest to assess a penalty for Respondents’ willful violation in 1993 of Section 17(d) of the ICA and Rule 17d-1 thereunder. The Passport Agreement involved a failure to obtain a regulatory exemption for a joint arrangement that caused WM Securities to advance $39,000 to an affiliate, resulting in a loss of $20,289. Respondents’ actions were willful and demonstrated a deliberate or reckless disregard for a regulatory requirement. The record shows that Respondents had little regard for regulatory constraints. Imposition of a civil penalty, therefore, is necessary to deter Respondents, and others, from similar conduct. In view of the amount of the losses suffered and Respondents lack of a disciplinary history, I reject the Division’s recommendation for civil penalties that approach the maximum amount permitted at the second tier. I will order WMM, Mr. Coxon, and Mr. Sergy, to pay second tier penalties of $50,000, $10,000 and $10,000, respectively, for the same actions that violated Section 17(d) of the ICA and Rule 17d-1 thereunder. IV. RECORD CERTIFICATION Pursuant to Rule 351(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.351(b) (1998), I certify that the record includes the items described in the revised record index issued by the Commission’s Secretary on June 1, 1998. V. ORDER Based on the findings and conclusions set forth above: I ORDER, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, Section 203(k) of the Advisers Act, and Section 9(f) of the ICA that WMM, Mr. Coxon, and Mr. Sergy shall cease and desist from committing or causing any violations or any future violations of Section 206(2) of the Advisers Act; Sections 10(b), 12(b), 13(a)(3), 17(d), and 34(b) of the ICA and Rule, 12b-1 and 17d-1 thereunder; Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. I FURTHER ORDER, pursuant to Sections 203(e)(5) of the Advisers Act that the registration of WMM be, and hereby is, suspended for a period of three months. I FURTHER ORDER, pursuant to 203(f) of the Advisers Act and Section 9(b) of the ICA that Mr. Coxon and Mr. Sergy be, and hereby are, suspended from being associated with an investment adviser or an investment company for a period of three months. I FURTHER ORDER, pursuant to Section 8A(e) of the Securities Act, Sections 21C(e) of the Exchange Act, Sections 203(j) and 203(k)(5) of the Advisers Act, and Sections 9(e) and 9(f)(5) of the ICA that WMM, Mr. Coxon, and Mr. Sergy disgorge $1,608,018, and prejudgment interest of $1,236,726. I reject the Division’s request that I direct the Fund to retain an independent investment manager to either exercise the Symantec option and then liquidate a large portion of the position in an orderly manner, or to sell the option in an orderly fashion. (Div. Proposed Findings of Fact and Conclusions of Law at 53-54.) The Division did not cite any statutory authority which would support this directive by the Commission. The Fund is not a party to the proceeding. I expect that the Fund’s board of directors will take whatever actions they believe appropriate based on the findings in this decision. I FURTHER ORDER, pursuant to Section 21B of the Exchange Act, Section 203(i) of the Advisers Act, and Section 9(d) of the ICA that WMM, Mr. Coxon, and Mr. Sergy pay total civil money penalties of $100,000, $20,000, and $20,000, respectively.[57] Payment of disgorgement and penalties, plus interest, shall be made on the first day following the day this decision becomes final by certified check, United States postal money order, bank cashier’s check, or bank money order payable to the U.S. Securities and Exchange Commission. The check and a cover letter identifying WMM, Mr. Coxon, and Mr. Sergy as Respondents in Administrative Proceeding No. 3-9218, should be delivered by hand or courier to the Comptroller, Securities and Exchange Commission, Operations Center 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312. A copy of the cover letter should be sent to the Commission’s Division of Enforcement. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360 (1998). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. ______________________________ Brenda P. Murray Chief Administrative Law Judge **FOOTNOTES** [1]: "Tr. __" refers to the transcript of the hearing. Counsel’s Exhibits 1 and 2 are lists of the parties’ exhibits. Joint Exhibits 1 and 2 are stipulations as to admissibility and to certain facts. I will refer to the exhibits as "Jt. Ex. __," "Div. Ex. __," or "Resp. Ex. __." Prehearing conferences were held on March 3, 1997, and April 17, 1997. "PH Tr. __" refers to the transcript of the prehearing. [2]: The original limited partners were Harry Browne and Robert Fritz. (Tr. 2124, 2126.) Mr. Browne and Mr. Fritz sold their interests to Alan Sergy or the Sergy Living Trust and Permanent Portfolio Information, Inc., respectively. (Tr. 635-37, 2127.) Mr. Coxon identified Robert Shaw or Shaw Bullion Trusts as a limited partner. (Tr. 2126.) At the hearing, WMM’s limited partners were said to be Terence Coxon, Robert F. Allen, Jr., Robert F. Schaub Irrevocable Trusts, Schaub Corporation, Sergy Living Trust, and Permanent Portfolio Information, Inc. (Tr. 244, 2126.) [3]: Mr. Coxon testified that from 1986 through 1990 he billed his personal investment adviser clients about ten hours per month. (Tr. 2201.) [4]: Mr. Browne invested $75,000 in WMM at its inception and sold that interest to Mr. Sergy in 1989. (Tr. 1427.) Since 1987, Mr. Browne has received $2,000 a month from WMM as a Fund consultant. (Div. Ex. 74.) Mr. Browne’s role is mainly to provide a public endorsement for the Permanent Portfolio. (Tr. 1402-10.) [5]: An independent or disinterested director is someone who directly, or through an immediate family member, has no affiliation with the mutual fund, who is not an interested person of the fund’s investment adviser or underwriter, who is not a broker or dealer or a person affiliated with a broker-dealer, who is not a person or partner or employee of someone who has acted as legal counsel within the last complete two fiscal years, and who has had no material business or professional relationship with the fund for two fiscal years. Section 2(a)(19)(A) of the ICA. [6]: The Advisory Contract was to be construed in accordance with the laws of the State of California. (Div. Ex. 71 at Part Five.) The Advisory Contract also required Fund officers to provide specific language in the registration statement to notify investors "of the Plan’s adoption and to describe further the Fund’s relationship" with the Adviser. (Div. Ex. 71 at Part Four.) [7]: WMM also created Bullion Security Corporation ("Bullion Corp.") in 1987 to sponsor units of U.S. Gold Trust, a new investment trust which held gold bullion and American Eagle coins. (Tr. 667, 943.) Mr. Coxon created WM Securities and Bullion Corp. with about $1,000 in WMM funds and $600,000 to $700,000 that the World Gold Council provided through an agreement with Sonoma Market Development. (Tr. 668-69, 945-47.) Mr. Coxon intended that WM Securities would act as distributor of Bullion Corp. units. (Div. Ex. 8.) Mr. Sergy was a director and officer of Bullion Corp. [8]: The Division’s mutual fund industry expert knew of only one fund that owned a broker dealer in 1989, the Vanguard organization. Unlike Vanguard where the investment company owns the adviser and the broker dealer, here a single portfolio owned the broker dealer. (Tr. 1146-47.) [9]: The evidence is that Mr. Sergy kept Mr. Coxon informed on all issues. I conclude therefore that Mr. Sergy’s knowledge is imputed to Mr. Coxon on this significant matter. (Tr. 724.) [10]: The Fund’s fiscal year runs from February 1 until January 31. In the beginning of calendar 1990, the Fund consisted of the Permanent Portfolio and the Treasury Bill Portfolio. The Aggressive Growth Portfolio was initiated after February 1, 1990. (Tr. 342-43.) [11]: The Division did not present any evidence as to the allegation in Section III.D. of the OIP, relating to costs allocated to the 12b-1 plan for the fiscal year February 1, 1989 through January 31, 1990. (PH Tr. 19; Tr. 796-98.) [12]: According to Respondents: All marketing expenses were placed in a cost pool, and the Fund paid a portion of the total pool. [T]he cost pool for 1990 was $1,062,459 . . . the Fund paid $516,387, and WMM paid the balance . . . while the Division refers to expenses "allocated" to the Fund, it inaccurately describes amounts allocated to the cost pool for which WMM sought partial reimbursement. (Resp. Post-Hearing Brief at 31.) [13]: WMM does not keep consolidated financial statements. WMM’s wholly-owned subsidiaries, with the year each began operations in parentheses, include: Bullion Corp. (1988); Sonoma Market Development, Inc. (1987); and Passport Financial (1992 or 1993). Mr. Coxon and Mr. Sergy were directors and officers of most of these entities, but appear to have received no compensation. (Tr. 880-85; Resp. Ex. 674.) [14]: The Division chose not pursue the allegations under Section 206(1) of the Advisers Act and Section 10(a) of the ICA. Also, I have summarized the allegations in the OIP because Respondents contend the Division has alleged in its Post Hearing Brief matters that were not specified in Section III of the OIP: Y. Respondents willfully violated Section 17(a) of the Securities Act; Z. Respondents willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; AA. WMM willfully violated Sections 206(1) and (2) of the Advisers Act; AB. Mr. Coxon and Mr. Sergy willfully aided and abetted and were a cause of WMM’s violations of Sections 206(1) and (2) of the Advisers Act; AC. Mr. Coxon and Mr. Sergy willfully violated Section 34(b) of the ICA; AD. Respondents willfully aided and abetted and were a cause of a violation of Section 12(b) of the ICA and Rule 12b-1(b) thereunder; AE. WMM and Mr. Coxon willfully aided and abetted and were a cause of a violation of Section 12(b) of the ICA and Rule 12b-1(b)(2) thereunder; AF. Respondents willfully aided and abetted and caused a violation of Section 12(b) of the ICA and Rule 12b-1(d) thereunder; AG. Mr. Coxon and Mr. Sergy willfully aided and abetted and were a cause of a violation of Section 12(b) of the ICA and Rule 12b-1(e) thereunder; AH. WMM and Mr. Coxon willfully aided and abetted and caused a violation of Section 10(a) of the ICA; AI. Respondents willfully aided and abetted and caused a violation of Section 10(b)(2) of the ICA; AJ. WMM willfully violated Section 17(d) of the ICA and Rule 17d-1 thereunder; AK. Mr. Coxon and Mr. Sergy willfully aided and abetted and were a cause of the violations of Section 17(d) of the ICA and Rule 17d-1 thereunder; and AL. Respondents willfully aided and abetted and caused a violation of Section 13(a)(3) of the ICA. [15]: Mr. Rolnick appears to have prepared initial drafts of documents, been present at some Board meetings, and answered oral inquiries from the disinterested directors. [16]: Based on his review of the Fund’s semi-annual report to shareholders, Mr. Rolnick initiated a memorandum to Mr. Coxon and Mr. Sergy on September 14, 1990, reminding them of the restrictions on Fund investments at Section 12(d)(3) of the ICA. (Resp. Ex. 664.) [17]: Mr. Cuggino wrote a memorandum on January 1, 1990, for possible inclusion in the auditor’s management letter noting that the Fund had incurred costs (transfer agent and auditing fees) that were not qualifying expenses under the contract. (Div. Ex. 2; Tr. 53.) The Fund hired Mr. Cuggino as Fund treasurer in January 1991. Michael Cuggino, CPA, a one-person firm ,is a consultant to WMM and several other companies controlled by Mr. Coxon. Mr. Cuggino’s salary of $6,300 a month is allocated among the Fund and the other Coxon related companies based on the time spent, and he receives other compensation based on economies achieved and profits realized. (Tr. 11-14.) [18]: Mr. Cuggino’s duties included coordinating the audit, managing the audit staff, making sure that the audit was performed in accordance with generally accepted audit standards, and that the audit report was in accordance with generally accepted accounting principles. (Tr. 23-24.) [19]: Mr. Martin, the chair of the audit committee, expected the auditors to come to him directly, but he expected Mr. Sergy to tell him if he heard something from the auditors. (Tr. 384.) [20]: Mr. Tier, a marketing specialist, could justify any Fund expense as a marketing expense. (Tr. 487.) Mr. Tier, however, acknowledged that something "really aggressive" could cross over the line to what is not allowed. (Tr. 487-88.) [21]: I do not understand how the Division arrived at $46,630. It appears to me that Respondents charged the 12b-1 plan $38,661.96 and this number included the fees of Mr. Webb, WMM’s auditor. (Compare Div. Post-Hearing Brief at 49 with Div. Ex. 133 at 5.) [22]: The Fund Board’s acceptance of the gift of the Adviser’s broker-dealer allowed WM Securities to get up and running faster but seems otherwise irrelevant to the Division’s allegation. [23]: As no load funds, the two portfolios were limited to distribution fees no higher than one quarter of one percent (0.25%) of assets. (Tr. 339.) The Treasury Bill Portfolio was a new fund so its allowable fees were small; its marketing budget under the 12b-1 plan in 1990 was $110,000. (Tr. 338, 970.) [24]: WM Securities earned $32,204 in commissions under the Selling Agreement in 1990. (Div. Ex. 95 at 11.) [25]: WM Securities earned $69,510 in commissions under the Selling Agreement in 1991. (Div. Ex. 96 at 11.) [26]: WMM was compensating Mr. Sergy for his consulting services when he signed the Selling Agreement. (Tr. 971.) Mr. Rolnick told the Fund Board that the arrangements between WMM and WM Securities satisfied the requirements of the ICA. (Tr. 347-48.) [27]: WMM paid trailing commissions to WM Securities from 1990 through 1996 when it was liquidated. (Tr. 358-59.) [28]: The same was also true of Mr. Chandler who was vice- president. (Tr. 876-79.) [29]: The Passport Agreement provided: Distributor [WM Securities] will pay, cause to be paid, or reimburse the Company for the first $40,000 of expenses of the Offering, including but not limited to registration and filing fees, printing, mailing and advertising costs, legal and accounting fees, and other expenses of distribution and soliciting orders . . . . in the event the Offering does not close, [WMM] will reimburse Distributor for fifty percent (50%) of the Expenses born by Distributor, or $20,000. In the event the Offering does close, [WMM] will pay Distributor such amount as will be necessary so that Distributor’s net commission income from the Offering will equal at least $40,000. (Div. Ex. 125, 7; Div. Ex. 98, 12.) [30]: The record contains a great deal of expert testimony on whether the instrument at issue was a warrant as the Respondents contend, or an option as the Division maintains. Mr. Cadden, Respondents’ expert on warrants and options, was persuasive in arguing that before 1980 the term warrant was limited generally to instruments with at most a three-year duration that were usually granted by corporations who upon exercise would issue shares of its stock. (Tr. 2162-64.) Since at least the mid- 1980s, however, the term warrant has been used to cover situations where, pursuant to an agreement, a person could acquire the subject of the agreement, given to a third party during the term of the agreement, at a predetermined price at a future date. (Tr. 2165-67.) For the reasons stated in the decision, I do not accept Mr. Cadden’s opinion that the instrument at issue here is a third-party covered warrant similar to warrants issued on stock indexes since the mid-1980s, which are settled in cash and pursuant to which no stock issued. (Tr. 2166-67.) [31]: If the Fund exercises the option, Mr. Layman intends to seek Mr. Coxon’s investment adviser advice. [32]: I take official notice, pursuant to Commission Rule of Practice 323, 17 C.F.R. § 201.323, of a Commission pamphlet, Invest Wisely: An Introduction to Mutual Funds, dated August 1996, which states: Rule 12b-1 fee: One type of ongoing fee that is taken out of fund assets has come to be known as a rule 12b-1 fee. It most often is used to pay commissions to brokers and other salespersons, and occasionally to pay for advertising and other costs of promoting the fund to investors. It usually is between 0.25% and 1.00% of assets annually. [33]: Respondents cite these cases as the only two reported civil cases involving shareholder challenges to 12b-1 expenses. [34]: Mr. Bobroff repeatedly stated his opinion that Respondents violated Rule 12b-1 based on WMM’s commitment to pay all operating expenses and the definition of that term in the prospectuses and advisory agreements. (Tr. 1182-83, 1202.) Respondents’ moved to strike his opinions based on Marx & Co. v. Diners Club, Inc., 550 F.2d 505, (2d Cir. 1977). (Tr. 1123-24.) I deny the motion. Mr. Bobroff was qualified as an expert on how operating expenses and distribution expenses were handled in the industry and whether the Adviser was responsible for the operating expenses charged to the 12b-1 plan. (Tr. 1072-73.) I agree with the case law that supports a broader view on admissibility than those cited by Respondents. Samuel H. Moss, Inc. v. FTC, 155 F.2d 1016 (2d Cir. 1946); Samuel H. Moss, Inc. v. FTC, 148 F.2d 378, 380 (2d Cir. 1945). [35]: The Division’s brief fails to explain why it did not dispute a small amount of transfer agent fees and custodian fees that related to services provided to new accounts. Mr. Bobroff, the Division’s expert, however, acknowledged that, in a general sense without considering this peculiar factual situation, a small portion of these expenses related to new accounts could be considered marketing expenses. The Division challenges $204,893.12 of the $224,872.37 in transfer agent fees and $9,256.57 of the $13,424.24 in custodian fees charged to the 12b- 1 plan. (Div. Post-Hearing Brief at 49 n.6. ) [36]: Printing and mailing expenses totaled $191,777.11. (Div. Ex. 133 at 3.) [37]: The Division’s approach corraborated Mr. Bobroff’s testimony that the cost of printing and mailing annual reports to non-shareholders could be considered a marketing expense. (Tr. 1165, 1186-87.) It also accommodates the example in the 1986 proxy statement approved by shareholders that a marketing expense could include the printing and distribution of Prospectuses and SAI to prospective investors. (Resp. Ex. 501 (emphasis added).) [38]: Aiding and abetting violations of the securities laws involve three elements: (i) a primary violation by another party; (ii) awareness or knowledge by the aider and abettor that his or her role was part of an overall activity that was improper; and (iii) that the aider and abettor knowingly and substantially assisted in the conduct that constituted the primary violation. Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009 (11th Cir. 1985); Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94 (5th Cir. 1975). [39]: Section 13(a)(3) refers to Section 8(b)(3) of the ICA which requires that the registration statement of a registered investment company recite all policies that the registrant deems matters of fundamental policy. [40]: The Fund’s prospectuses issued in 1990, 1991, and 1992 also stated that the portfolio’s aggressives growth stock holdings would include "stock warrants and stocks of U.S. companies." (Div. Exs. 21 at 7, 23 at 3, 25 at 3.) [41]: Scienter is defined as a "mental state embracing the intent to deceive, manipulate, or defraud." Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). [42]: Recklessness is defined as "an extreme departure from the standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992) (quoting Sunstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977). [43]: The OIP charges all Respondents with a violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Mr. Coxon and Mr. Sergy with a violation of Section 34(b) of the ICA. (Section III.Y., Z., and AC.) The Division’s Post-Hearing Brief argued that while the Fund technically circulated and filed the prospectuses and SAI, Respondents willfully caused the antifraud violations and "their controlling influence as Fund officers is sufficient to establish their aiding and abetting of the Fund’s violations." (Div. Post Hearing Brief at 62.) [44]: At the hearing, Mr. Sergy was not so forthcoming and did not know what Mr. Coxon did. (Tr. 865.) [45]: Section 2462 provides that, "[e]xcept as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued." [46]: As noted previously, willfulness does not require an intent to violate the law, nor does it require "deliberate or reckless disregard of a regulatory requirement." Jacob Wonsover, Exchange Act Rel. No. 41123, 1999 WL 100935, at *9 (March 1, 1999). [47]: Section 9(b) provides that: The Commission may . . . prohibit, conditionally or unconditionally, either permanently or for such period of time as it in its discretion shall deem appropriate in the public interest, any person from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter . . . . [48]: See Jacob Wonsover, Exchange Act Rel. No. 41123, 1999 WL 100935, at *10 (March 1, 1999) ("Members of the securities industry agree to be subject to the statutes, rules, and regulations administered by the Commission and self-regulatory organizations, and, before entering the business, generally must apply for registration and pass examinations demonstrating their knowledge of the securities laws"). [49]: Respondents’ failure to acknowledge any wrongdoing indicates a strong likelihood of future violations in the absence of an order requiring that they cease and desist. [50]: The Commission’s Rules of Practice mandate the assessment of prejudgment interest "on any sum required to be paid pursuant to an order of disgorgement." 17 C.F.R. § 201.600(a) [51]: See generally, Div. Proposed Findings of Facts and Conclusions of Law at 47-52; Div. Post-Hearing Brief at 69-73. This total is the sum of the amounts set out in the text of the decision that follows. [52]: In calendar 1990, Respondents charged the Fund’s 12b-1 plan for $224,872.37 in transfer agent fees, $34,500 in Ernst & Young auditing fees, and $12,130 in George Webb auditing fees for WMM. [53]: The Division separates the prejudgment interest into two components: $125,764.28 on the $182,005 in printing costs of the two portfolios from January 1991 through May 1997, and $82,024.38 on the $154,566 in printing costs from January 1992 through May 1997. (Div. Post-Hearing Brief at 71.) [54]: Supra, note 52. [55]: The Board did not approve the 1991 lease for office space entered at the same time as WM Securities leased adjoining space. [56]: See generally, Div. Proposed Findings of Facts and Conclusions of Law at 51-53; Div. Post-Hearing Brief at 74-75. [57]: This is the sum of two separate $50,000, $10,000 and $10,000 penalties for violations of Section 206(2) of the Advisers Act and Section 17(d) of the ICA and Commission Rule 17d-1 in connection with the Passport offering. 1