SEC, CFTC Sign Agreement to Enhance Coordination, Facilitate Review of New Derivative Products
Agencies Also Announce First Fruits of Collaboration: Joint Action on Gold Products
Securities and Exchange Commission Chairman Christopher Cox and Commodity Futures Trading Commission Acting Chairman Walter L. Lukken today signed a ground-breaking mutual cooperation agreement to establish a closer working relationship between their agencies. The agencies also announced their immediate plans to consider two new derivative products under the agreement.
The agreement establishes a permanent regulatory liaison between the agencies, provides for enhanced information sharing, and sets forth several key principles guiding their consideration of novel financial products that may reflect elements of both securities and commodity futures or options.
"This agreement represents a valuable coordination of the roles of the SEC and the CFTC in our capital markets," said SEC Chairman Cox. "Years ago, when the dividing lines between our agencies' regulated products were bright, the high level of coordination we are establishing today was not a priority for the U.S. government. But today, the blurring of these distinctions requires the U.S. government to adopt a more coherent and coordinated approach. To this end, we look forward to enhancing our collaborative relationship with the CFTC within the formal framework covered by the agreement."
"As innovation blurs financial sector lines, this agreement will create regulatory synergies between the agencies for the benefit of the public," said CFTC Acting Chairman Lukken. "While recognizing our distinct missions, the MOU establishes a solid framework for increased cooperation and communication between the CFTC and SEC. The agreement also contains specific principles to guide future consideration of novel products, with the goal of reviewing product filings expeditiously, providing legal certainty for participants, encouraging market neutrality and choice, and enhancing innovation and competitive growth. This is smart government, and we look forward to this new era of enhanced cooperation with the SEC."
Today, as tangible evidence of their closer relationship, the agencies also announced they are issuing notices requesting public comment on two new products. Both products would be based on the streetTracks ® Gold Trust Shares (Gold Shares). One product is an option that would be traded on options exchanges, and the other is a future that would trade on a single stock futures exchange. The requests for comment will be published in the Federal Register shortly.
In addition, the Options Clearing Corporation, which is subject to the joint jurisdiction of the agencies in certain areas, recently filed with both the SEC and the CFTC for approval to clear and settle both of the new products. Both agencies expect to act on these filings expeditiously and issue notices for public comment in the near future.
The two new products have raised questions about how they best should be regulated under federal law. Other recent products, such as credit default options, have raised similar questions. The Memorandum of Understanding addresses how the agencies will approach products that raise these issues in this burgeoning area of financial innovation. It also establishes a framework that will facilitate discussions and coordination regarding issues in other areas of common regulatory interest between the two agencies, such as portfolio margining, foreign security index products, and the oversight of firms registered with both agencies.
Under the principles governing the review of novel derivative products, the agencies agree to recognize their mutual regulatory interests and encourage innovation, competition, and legal certainty. Additionally, the agencies commit to share information relating to novel derivative products and act on any related requests in a timely manner. Finally, the agencies agree to endeavor, for products that implicate overlapping areas of regulatory concern, to permit such novel derivative products to trade in either or both a CFTC- or SEC-regulated environment, in a manner consistent with their respective laws and regulations.
Enhanced coordination and cooperation between the SEC and CFTC are critical to providing effective oversight and legal certainty, while avoiding unnecessary duplication and undue regulatory burdens. The Commissions historically have taken action to further these objectives. For example, the Commissions previously entered into an MOU in March 2004 regarding their joint oversight of security futures products (SFPs), pursuant to the Commodity Futures Modernization Act of 2000, and the sharing of information on SFPs. The Commissions also have regularly cooperated in matters of shared enforcement concern. Implementation of today's agreements will further the effectiveness and efficiency of the SEC and CFTC in other areas of common regulatory interest by improving interagency coordination and communication. (Press Rel. 2008-40)
In the Matter of Thomas C. Bridge, et al.
An Administrative Law Judge has issued an Initial Decision in the matter of Thomas C. Bridge, et al. finding that Thomas C. Bridge (Bridge) has violated Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and that James D. Edge (Edge) and Jeffrey K. Robles (Robles) failed reasonably to supervise Bridge and Charles Sacco, who in 2001 through September 2003, were associated with A.G. Edwards, a registered broker-dealer, at branch offices in Boca Raton, Florida, and Boston, Massachusetts, respectively. As a result of the violations:
Bridge has been ordered to cease and desist from committing or causing any violations, or any future violations, of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; to disgorge $39,808.53, plus prejudgment interest; to pay a civil money penalty of $250,000; and is suspended from association with a broker or dealer for one year.
Edge has been ordered to pay a civil money penalty of $250,000; suspended from association with a broker or dealer for thirty days; and barred from association in any supervisory capacity; and
Robles has been ordered to pay a civil money penalty of $250,000; suspended from association with a broker or dealer for thirty days; and barred from association in any supervisory capacity. (Initial Decision No. 346; File No. 3-12626)
In the Matter of Michael R. Donnell
On March 11, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisors Act) and Section 9(b) of the Investment Company Act of 1940 as to Michael R. Donnell (Order). The Order finds that from March 2002 until his termination in March 2004, Donnell was a vice president of Mercantile Capital Advisors, Inc. (Mercantile Advisors), a registered investment adviser. Mercantile Advisors manages a "fund of hedge funds" investment company (Mercantile Fund) that is registered with the Commission, and Donnell was also a vice president of the Mercantile Fund. Donnell and his supervisor were responsible for finding a sub-adviser to manage the Mercantile Fund's portfolio. Donnell recommended hiring a sub-adviser which he knew had promised to pay a referral fee to one of Donnell's immediate relatives, if the sub-advisor was retained by the Mercantile Fund. Based in part on Donnell's recommendation, the Mercantile Fund retained the sub-adviser which in turn made good on its promise and began making regular referral fee payments to Donnell's relative. The Order also finds that the payments created a conflict of interest, but Donnell did not disclose the conflict or the payments to anyone at Mercantile Advisors or to the board of directors of the Mercantile Fund and thereby willfully aided and abetted and caused violations of Sections 206(1) and 206(2) of the Investment Advisers Act.
Based on the above and pursuant to the Order, Donnell is ordered to cease and desist from committing or causing any violation of and any future violations of Sections 206(1) and 206(2) of the Advisers Act and is barred from association with any investment adviser, and is prohibited 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, with the right to reapply for association after three years to the appropriate self-regulatory organization, or if there is none, to the Commission. Mr. Donnell consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. IA-2718; IC-28192; File No. 3-12986)
SEC Charges CEO of MyPrint with Insider Trading
On March 10, the Commission charged Kent Barkouras with insider trading in Mentor Corporation securities while his company, MyPrint Corporation, was a Mentor subcontractor and had received sensitive nonpublic information. Barkouras is the CEO and largest shareholder of privately-held MyPrint, a technology, print and fulfillment company located in Irvine, California.
The Commission's complaint, filed today in federal district court in Orange County, alleges that Barkouras, age 47, of Newport Beach, California, traded on the basis of confidential information about the FDA's approval of Mentor's silicone-gel filled breast implants. Barkouras had access to this sensitive information through MyPrint's role to store and ship Mentor's breast implant starter kits containing marketing materials for physicians. Barkouras purchased Mentor securities just hours before Mentor's public announcement of the FDA approval. The complaint alleges that Barkouras even tipped a family member, who traded ahead of the announcement. Barkouras and his relative realized illegal profits of $80,295 from their trades.
The Commission's complaint alleges that MyPrint received confidential information about the FDA approval so it could immediately begin shipping the starter kits. According to the complaint, on the morning of Mentor's public announcement, a MyPrint employee emailed Barkouras about the FDA approval stating: "Buy Mentor stock Now $$." Further, the complaint alleges that while Barkouras cautioned the employee about the confidentiality of the information, he was purchasing 543 Mentor call options on the morning of Nov. 17, 2006-just ahead of the public announcement. After the market closed that day, Mentor made the announcement about the FDA approval. On the first trading day after the announcement, Mentor's stock price increased by more than 10 percent and its trading volume increased 650 percent. The complaint alleges that by engaging in such trading, Barkouras traded on the basis of material nonpublic information in breach of his duty of trust and confidence to MyPrint's client, Mentor.
To settle the Commission's charges, Barkouras consented, without admitting or denying the allegations in the complaint, to a final judgment permanently enjoining him from future violations of the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering him to pay $166,644, representing the disgorgement of his and his relative's illegal trading profits, prejudgment interest, and a civil penalty in an amount equal to the profits, pursuant to Section 21A(a) of the Exchange Act.
The Commission acknowledges the assistance of the Chicago Board Options Exchange. [SEC v. Kent G. Barkouras, Civil Action No. SACV 08-0260 AHS (ANx), USDC, C.D. Cal.] (LR-20485)
SEC Sues Former "Teach Me to Trade" Workshop Speakers for Securities Fraud
The Commission today filed civil fraud charges against Linda Woolf and David Gengler, former speakers for "Teach Me to Trade" (TMTT) securities trading workshops. The Commission also charged Woolf's and Gengler's corporations, Hands On Capital, Inc., and Lashaico, Inc. The Commission's complaint alleges that Woolf and Gengler made false and misleading statements in televised infomercials and investor workshops to dupe investors into believing they would make extraordinary profits trading securities if they purchased TMTT products and services. TMTT-a unit of Whitney Information Network, Inc., a publicly traded company based in Cape Coral, Florida-conducts nationwide investor workshops that purport to teach investors the secrets to making money in the stock market. Woolf and Gengler, both residents of Utah, misrepresented, among other things, their own success trading securities as well as the success rate of others who purchased TMTT packages that consisted of securities trading mentoring, software and classes.
The Commission's complaint alleges that during workshop presentations made between 2003 and 2006-some of which were captured on videotape-Woolf and Gengler used lies and misrepresentations in order to sell expensive TMTT packages of personal mentoring, software and classes for prices ranging from approximately $11,000 to $40,000. According to the Commission's complaint, Woolf and Gengler appeared in television infomercials portraying themselves as successful former TMTT customers. The complaint also alleges that at the workshops, Woolf and Gengler expanded on their false claims about their success as securities traders. They misrepresented to audiences that they themselves had purchased personal mentoring, classes and software to learn to trade, and quickly profited by trading securities. Woolf targeted retirees, among others. Gengler urged investors to liquidate their retirement accounts to follow TMTT strategies. Through false stories of their own success and false claims of a 96.5% success rate for TMTT students who purchased personal mentoring, courses and software, Woolf and Gengler convinced investors that they too would make money in the stock market if they followed TMTT's trading strategies that emphasized options trading and short-term swing trading.
In fact, the Commission alleges, Woolf and Gengler's tales of trading success were not true. In reality, they are unsuccessful traders whose wealth came not from trading securities but from selling expensive TMTT packages. Woolf's and Gengler's claims about a 96.5% success rate of others who purchased certain TMTT packages and followed TMTT's trading strategies also had no basis in fact. The complaint alleges that Woolf reaped approximately $4 million from selling TMTT packages, and Gengler made approximately $2.25 million.
The Commission's complaint alleges that Woolf, Gengler, Hands On Capital, Inc., Lashaico, Inc. violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also seeks disgorgement of ill-gotten gains, civil money penalties and permanent injunctions enjoining the defendants from violating the antifraud provisions of the federal securities laws. [SEC v. Linda Woolf, David Gengler, Hands On Capital, Inc., and Lashaico, Inc., Civil Action No. 1:08cv235 GBL/BRP] (LR-20486)
SEC Obtains Judgments against Theodore Roxford and Hollingsworth, Rothwell & Roxford for Tender Offer Fraud and Market Manipulation
On March 3, in a civil action previously filed by the Commission, Judge P. Kevin Castel of the United States District Court for the Southern District of New York entered a judgment permanently restraining and enjoining the partnership Hollingsworth, Rothwell & Roxford (HRR) from future violations of the anti-manipulation and tender offer anti-fraud provisions of the federal securities laws, Sections 9(a) and 14(e) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 14e-8 thereunder. HRR was ordered to pay $900,000 in civil monetary penalties, pursuant to Section 21(d)(3) of the Exchange Act. On March 7, 2008, in the same matter, Judge Castel also entered a judgment permanently restraining and enjoining Theodore Roxford a/k/a Lawrence David Niren (Roxford) from future violations of Exchange Act Sections 9(a) and 14(e), and Rule 14e-8 thereunder. Roxford was also ordered to pay $900,000 in civil monetary penalties. Both judgments were entered by default.
The Commission's complaint alleged that beginning in 2003, Roxford, in some instances through the partnership HRR, made false and materially misleading statements in connection with purported tender offer announcements for five publicly-traded companies - Sony Corporation, Zapata Corporation, Edgetech Services, Inc., Playboy Enterprises, Inc., and PeopleSupport, Inc. In connection with these phony offers, Roxford, and in some cases HRR, made misrepresentations to the public regarding the existence of financial backers or banks that supposedly were interested in financing the tender offers, even though Roxford and HRR did not have any financial backing nor independent means of financing the acquisitions. Roxford and HRR publicized the phony offers through press releases, internet message board postings, and in at least one filing with the Commission. They made these fake offers in order to manipulate the price of the target companies' stock by inducing investors to purchase the stock.
With judgments entered against all of the defendants, this concludes the Commission's action in this matter. [SEC v.Theodore Roxford a/k/a Lawrence David Niren and Hollingsworth, Rothwell & Roxford, Civil Action No. 07-CV-6146 (S.D.N.Y.)] (LR-20487)
INVESTMENT COMPANY ACT RELEASES
MetLife Insurance Company of CT, et al.
A notice has been issued giving interested persons until April 14, 2008, to request a hearing on an application filed by MetLife Insurance Company of Connecticut, et al. requesting an order pursuant to Section 26(c) of the Investment Company Act to permit substitution of shares of certain registered management investment companies with shares of certain other registered management investment companies. The applicants also seek an order of exemption pursuant to Section 17(b) of the Act from Section 17(a) of the Act to the extent necessary to permit certain in-kind transactions in connection with the substitutions. (Rel. IC-28190 - March 10)
Jefferson National Life Insurance Company, et al.
A notice has been issued giving interested persons until April 2, 2008, to request a hearing on an application filed by Jefferson National Life Insurance Company (JNL), Jefferson National Life Annuity Account C (Separate Account C), Jefferson National Life Annuity Account E (Separate Account E), Jefferson National Life Annuity Account F (Separate Account F), Jefferson National Life Annuity Account G (Separate Account G), Jefferson National Life Annuity Account H (Separate Account H), Jefferson National Life Annuity Account I (Separate Account I), Jefferson National Life Annuity Account J (Separate Account J), Jefferson National Life Annuity Account K (Separate Account K), Conseco Variable Insurance-Separate Account L (together with Separate Account C, Separate Account E, Separate Account F, Separate Account G, Separate Account H, Separate Account I, Separate Account J, Separate Account K, and JNL, Applicants), and Northern Lights Variable Trust (NLVT and together with Applicants, Section 17 Applicants).
Applicants request an order under Section 26(c) of the Investment Company Act to permit the substitution of shares of the PIMCO Variable Insurance Trust Money Market Portfolio for shares of the JNF Money Market Portfolio, a series of NLVT. Section 17 Applicants also request an order pursuant to Section 17(b) of the Act exempting them from the provisions of Section 17(a) of the Act to permit certain in-kind transactions in connection with the substitutions. (Rel. IC-28191 - March 10)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change (SR-CHX-2007-18), as modified by Amendment No. 1 thereto, submitted under Rule 19b-4 of the Securities Exchange Act of 1934 by the Chicago Stock Exchange to make administrative changes to its routing rules. Publication in the Federal Register is expected during the week of March 10. (Rel. 34-57454)
The Commission granted approval of a proposed rule change (SR-NYSE-2008-03), as modified by Amendment No. 1 thereto, submitted by the New York Stock Exchange to rescind NYSE Rule 97 (Limitation on Member's Trading Because of Block Positioning). Publication in the Federal Register is expected during the week of March 10. (Rel. 34-57455)
The Commission granted approval of a proposed rule change (SR-NYSEArca-2008-12) submitted by NYSE Arca, through its wholly owned subsidiary, NYSE Arca Equities, Inc., pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 relating to pricing information for components underlying Currency-Linked Securities. Publication in the Federal Register is expected during the week of March 10. (Rel. 34-57460)
Immediate Effectiveness of Proposed Rule Change
A proposed rule change (SR-BSE-2008-13) filed by the Boston Stock Exchange relating to the fee schedule of the Boston Options Exchange has become effective under Section 19(b)(3)(A) under the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of March 10. (Rel. 34-57459)
SECURITIES ACT REGISTRATIONS
RECENT 8K FILINGS