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Litigation Release No. 20659 / July 29, 2008

Securities and Exchange Commission v. David S. Davidson, et al., Civil Action No. 05-CV-742 (E.D.Pa.)

Former CEO and President of Broker-Dealer Settle SEC Charges Related To Their Involvement in a Fraudulent Short Selling Scheme

The Securities and Exchange Commission announced today that on July 24, 2008, the Honorable Berle M. Schiller, United States District Judge for the Eastern District of Pennsylvania, entered a final judgment against David S. Davidson, former chairman and chief executive officer of D.L. Cromwell Investments, Inc., a defunct broker-dealer, and Lloyd S. Beirne, its former president, for their involvement in a fraudulent short selling scheme involving the stock of Expedia, Inc., in SEC v. Davidson, et al., C.A. No. 05-CV-742.

The Commission's complaint, filed on February 17, 2005, alleged that, from late October 2002 through March 2003, Davidson and Beirne used Cromwell's online access to its clearing broker's system to fraudulently enter and then cancel fictitious Expedia buy orders. The complaint further alleged that Davidson and Beirne caused to be entered and then cancelled these fictitious buy orders almost daily for five months, concealing the size of Cromwell's short position and its margin problems from the clearing broker. When the fraud was discovered, after the announcement of a tender offer for Expedia that greatly increased its share price, the clearing broker was required to pay $18 million to cover the short position.

Davidson and Beirne were criminally charged with fraudulent conduct relating to the short selling scheme described in the Commission's complaint and, on October 25, 2007, after pleading guilty before the United States District Court for the Eastern District of New York in United States v. David S. Davidson and Lloyd S. Beirne, 02-CR-681 (S-1) and 04-CR-583, each was sentenced to five years of probation, and ordered to pay, among other things, $6.9 million in restitution.

Without admitting or denying the allegations in the Commission's complaint, Davidson and Beirne consented to the entry of a final judgment that permanently enjoins them from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Based on the sanctions imposed in the criminal proceedings, the defendants were not ordered to pay disgorgement or a civil penalty. Davidson and Beirne also consented to the entry of Commission orders barring them from association with any broker or dealer.

For further information, please see Litigation Rel. No. 19090 (February 17, 2005).



Modified: 07/29/2008