Exhibit 99.4
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
DEFERRED CONSIDERATION AGREEMENT
XXXXXX X. XXXXX & COMPANY, L.P. ("Xxxxxx Xxxxx")(1), by its
undersigned attorneys, pursuant to authority granted by the Executive
Committee of Xxxxxx Xxxxx (a copy of a resolution to this effect is attached
hereto as Exhibit A), and the United States Attorney's Office for the
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Eastern District of Missouri (the "Office"), hereby enter into this Deferred
Consideration Agreement (the "Agreement").
BACKGROUND
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1. The Office has investigated the conduct of Xxxxxx Xxxxx
relating to revenue sharing payments made by certain mutual funds that have
been designated as preferred funds ("Preferred Fund Families" or "Preferred
Funds"), including other special compensation arrangements such as equity
investments ("Revenue Sharing").
2. The Office has determined to defer consideration of any
action stemming from this investigation regarding Revenue Sharing in
consideration for the execution and implementation of this Agreement by
Xxxxxx Xxxxx.
3. For purposes solely of this investigation and any
subsequent judicial proceeding by this Office, but not as an admission to be
made in any way in any civil, regulatory, administrative or other legal
proceeding, Xxxxxx Xxxxx acknowledges the following conduct committed during
the relevant time period:
(a) Xxxxxx Xxxxx recommended Preferred Funds to
Xxxxxx Xxxxx' customers. While most of the Preferred Funds were designated
as such before the
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(1) For purposes of this Agreement, Xxxxxx Xxxxx is defined to include its
affiliates The Xxxxx Financial Companies, L.L.L.P. and EDJ Holding Company,
Inc.
commencement of the payment of revenue sharing, eventually all of the
Preferred Funds provided some form of revenue sharing to Xxxxxx Xxxxx.
Although circumstances varied among the Preferred Funds once Xxxxxx Xxxxx
began receiving revenue sharing, Xxxxxx Xxxxx did not provide a disclosure
about the receipt of revenue sharing to its customers separate and apart
from the disclosures set forth, or to be set forth, in the Prospectuses or
Statements of Additional Information issued by the Preferred Funds;
(b) Xxxxxx Xxxxx sometimes promoted to its
brokers, known within Xxxxxx Xxxxx as Investment Representatives ("IRs"),
the existence of revenue sharing by Preferred Families, as well as
permitted, and on occasion encouraged, IRs, on a case-by-case basis, to
consider revenue sharing in making recommendations to their customers to
purchase certain mutual funds;
(c) The website for Xxxxxx Xxxxx discussed
Preferred Funds but did not disclose revenue sharing with respect to such
funds.
(d) Revenue sharing was one of several important
factors in the selection of two Preferred Funds. With respect to the
retention of funds as preferred, revenue sharing was again important among
several considerations.
(e) On January 22, 2004, the SEC Staff informed
Xxxxxx Xxxxx that the Staff intended to recommend an SEC enforcement action
against Xxxxxx Xxxxx based on its revenue sharing activities. The Staff gave
Xxxxxx Xxxxx until February 3, 2003 to make a Xxxxx Submission. Xxxxxx Xxxxx
submitted a Xxxxx Submission on that date, prior to concluding its inquiry
into the matter. Certain statements in the Xxxxx Submission were inaccurate.
4. Xxxxxx Xxxxx, in further consideration for this
Agreement, agrees to undertake the following:
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(a) Enter into an Agreement (the "SEC Agreement")
with the Securities and Exchange Commission ("SEC"), the National
Association of Securities Dealers ("NASD") and the New York Stock Exchange
("NYSE") pursuant to which Xxxxxx Xxxxx will pay Seventy-Five Million
Dollars ($75,000,000.00) to be distributed to Xxxxxx Xxxxx' customers in
accordance with procedures established pursuant to 15 U.S.C. Section 7246,
commonly known as the "Fair Fund" and as implemented by the terms of the SEC
Agreement in resolution of any claims of the Securities and Exchange
Commission, the NASD and the New York Stock Exchange pertaining to Revenue
Sharing;
(b) Continue to fully cooperate with the Office,
the U.S. Postal Inspection Service, the Federal Bureau of Investigation
("FBI" and collectively, the "Investigative Entities") and the SEC;
(c) Make adequate disclosures (i) to current
Xxxxxx Xxxxx customers, (ii) to customers at point of sale, (iii) to its
Investment Representatives through training materials and other educational
means, and (iv) on Xxxxxx Xxxxx' website regarding the payment of revenue
sharing in forms agreeable to this Office, and not inconsistent with the
requirements imposed by the SEC or to be established in accordance with
rules and regulations to be issued by the SEC;
(d) To minimize the possibility described in
Paragraph 3(b) above, revise Xxxxxx Xxxxx' bonus methodology for IRs by
allocating fees for determining the IR bonus on the basis of assets under
management for an IR;
(e) Offer to Xxxxxx Xxxxx' customers currently
holding shares in Preferred Funds for a period of ninety days the
opportunity to switch such holdings without the payment of certain fees by
selling the customers' interest in the Preferred Funds at net asset value to
purchase shares of mutual funds in either a different Preferred Fund or any
other mutual
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fund with which Xxxxxx Xxxxx has a selling agreement (the "Switch Funds").
For this purpose, commissions typically paid to Xxxxxx Xxxxx and the Switch
Funds commonly known as the "load" will either be waived by Xxxxxx Xxxxx and
the Switch Funds or Xxxxxx Xxxxx will pass through the commissions received
by Xxxxxx Xxxxx and the Switch Funds back to the customers;
(f) Allocate responsibility for the payment of
the amount due under the SEC Agreement with disproportionate impact upon the
general partners, subject to the reasonable satisfaction of the Office,
including restoring to the Xxxxxx Xxxxx limited partners the income that
would otherwise have been paid this Quarter and eliminating the taxable
impact otherwise payable by the limited partners attributable the payments
due under the SEC Agreement;
(g) Institute a Corporate Governance Program with
an independent employee of Xxxxxx Xxxxx reporting to a reconstituted
Executive Committee solely for this purpose with the following
responsibility:
(i) appropriate disclosures of
conflicts of interest involving
the payments by Preferred Funds
to Xxxxxx Xxxxx customers,
including revenue sharing; (2)
establish a telephone hotline
by which employees may
anonymously report potential
violations of the law and to
publicize to employees the
purpose and existence of the
hotline and provide assurance
that no negative action will be
taken based on the submission
of hotline reports; (3)
adoption of procedures to
ensure that all inquiries by
government entities and by
Investment Representatives
regarding disclosures of
conflicts of interest receive
prompt review, including
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reporting of such matters, as
appropriate, to the Compliance
Department, the Managing
Partner or the Executive
Committee of Xxxxxx Xxxxx; (4)
development of an annual
program for senior management
of Xxxxxx Xxxxx for training
and education on disclosures of
conflicts of interest issues;
and (5) removal of partners or
employees whose conduct is
deleterious to Xxxxxx Xxxxx.
(h) So as to rectify a past practice, Xxxxxx
Xxxxx agrees that representatives of mutual funds with whom it has selling
agreements and that are not Preferred Funds may have reasonable access to
IRs, assuming compliance with Xxxxxx Xxxxx' general standards regarding
mutual funds;
(i) Reimburse the investigation costs and
expenses of the United States Postal Service by payment of $200,000
following execution of this Agreement as directed by the Office;
(j) Participate in the Pre-Trial Diversion
Program.
5. During the term of this Agreement, Xxxxxx Xxxxx agrees
that its continuing cooperation shall include, but not be limited to, the
following:
(a) Completely and truthfully disclosing all
information in its possession to the Investigative Entities about which the
Investigative Entities may reasonably inquire, including, but not limited
to, all information about activities of Xxxxxx Xxxxx, present and former
partners of Xxxxxxx Xxxxx, and Xxxxxx Xxxxx' officers, employees and agents;
(b) Providing all documents, records and other
evidence in Xxxxxx Xxxxx' possession, custody or control as reasonably may
be requested by any of the Investigative Entities;
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(c) Providing information to the Office to
demonstrate compliance with the provisions of this Agreement, including
reasonable access to records and employees of Xxxxxx Xxxxx to verify the
actions taken by Xxxxxx Xxxxx to fulfill the terms of this Agreement;
(d) Not asserting, in relation to the
Investigative Entities only, any claims of attorney-client privilege or
attorney work-product doctrine as to any documents, records, information or
testimony requested by the Investigative Entities related to:
(i) legal advice given
contemporaneously with, and
related to the payment of
revenue sharing during the
period prior to 2004;
(ii) the preparation and presentation
of a so-called "Xxxxx
Submission" presented to the SEC
by Xxxxxx Xxxxx by letter dated
February 3, 2004; and/or
(iii) Using its reasonable best
efforts to make available its
present and former officers and
employees to provide information
and/or testimony as requested by
the Investigative Entities,
including sworn testimony before
a grand jury or in court
proceedings, as well as
interviews with law enforcement
authorities. Cooperation under
this paragraph shall include
identification of witnesses who,
to Xxxxxx Xxxxx' knowledge and
information, may have material
information.
(e) Providing testimony or information necessary
to identify or establish the original location, authenticity or other basis
for admission into evidence of documents or physical evidence in any
proceeding as requested by the Investigative Entities; and
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(f) With respect to any information, testimony,
documents, records or physical evidence provided by Xxxxxx Xxxxx to the
Investigative Entities or a grand jury, Xxxxxx Xxxxx consents to any and all
disclosures of such materials to such Investigative Entities as the Office,
in its sole discretion, deems appropriate. With respect to any such
materials that constitute "matters occurring before the grand jury" within
the meaning of Rule 6(e) of the Federal Rules of Criminal Procedure, Xxxxxx
Xxxxx further consents to:
(i) any order sought by the Office
permitting such disclosures;
and
(ii) the Office's ex parte or in
camera application for such
orders.
(g) The disclosure of information set forth above
is limited solely to the disclosure to the Investigative Entities for
purposes of federal enforcement matters and does not constitute a waiver in
any respect of any privileges of Xxxxxx Xxxxx for any other purpose or any
other proceeding.
6. Xxxxxx Xxxxx agrees that, following the expiration of
this Agreement, Xxxxxx Xxxxx will continue to fulfill the cooperation
obligations set forth in Paragraph 5 above in connection with any
investigation or proceeding brought by any of the Investigative Entities
relating to or arising out of the conduct addressed herein. Xxxxxx Xxxxx'
obligation to cooperate is not intended to apply in the event that Xxxxxx
Xxxxx is a defendant in any such proceeding.
7. Xxxxxx Xxxxx shall not, through its attorneys, senior
management or agents, make any public statement contradictory to the express
terms of the acknowledgments set forth in Paragraph 3 of this Agreement.
Upon the Office learning that Xxxxxx Xxxxx has made a public statement in
violation of this provision, the United States Attorney shall notify
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Xxxxxx Xxxxx of the apparent violation and Xxxxx will have three days to
cure the apparent violation by repudiating the public statement that
constituted the violation of this provision.
8. This Agreement may be made public by the Office.
9. Xxxxxx Xxxxx agrees that the statute of limitations is
tolled for the duration of this Agreement with respect to any action that
may be initiated by the Office with respect to Revenue Sharing. Xxxxxx Xxxxx
does not waive or forfeit its right to assert any statute of limitations
defenses that may be available as of the date of this Agreement.
10. This Agreement is binding on this Office but
specifically does not bind any other Federal agencies, any state or local
law enforcement agencies, any licensing authorities, or any regulatory
authorities. However, if requested by Xxxxxx Xxxxx or its attorneys, the
Office will bring to the attention of any such agencies the cooperation of
Xxxxxx Xxxxx and its compliance with its obligations under this Agreement.
It is the intent of the parties to this Agreement that the Agreement does
not confer or provide any benefits, privileges or rights to any individual
or other entity other than the parties hereto, and that neither the
Agreement nor anything contained herein shall be admissible in any
proceeding other than a proceeding brought by the Office. Moreover, Xxxxxx
Xxxxx may raise defenses and/or assert affirmative claims in any civil
proceedings brought by private parties as long as doing so does not
otherwise violate any term of this Agreement.
11. This Agreement will remain in effect for a period of
twenty-four months during which time Xxxxxx Xxxxx will provide a quarterly
report to the Office detailing its progress in satisfying the requirements
of this Agreement.
12. In consideration of Xxxxxx Xxxxx' remedial actions to
date and its agreement to: (a) acknowledge the conduct as set forth in
Paragraph 3; (b) continue its cooperation with the Office, the SEC and the
Investigative Entities; (c) take the actions required
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and make the payments specified in Paragraph 4; (d) comply with Federal
laws, including Federal securities laws; and (e) otherwise comply with all
of the terms of this Agreement, the Office will defer consideration of any
action for a period of twenty-four months and shall not initiate action at
the end of the twenty four month period regarding Revenue Sharing if the
obligations of Xxxxxx Xxxxx under the Agreement have been satisfied.
XXXXXX XXXXX & COMPANY, L.P.
Date: By:
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Xxxxxx Xxxxx
Treasurer
EDJ Holding Company, Inc.
Sole General Partner
Xxxxxx X. Xxxxx & Company, L.P.
UNITED STATES ATTORNEY'S
OFFICE, EASTERN DISTRICT OF
MISSOURI
Date: By:
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Xxxxx Xxxxxx
United States Attorney
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