RULES AND RELATED MATTERS
Commission Amends Securities Act Forms, Exchange Act Rules and Schedules, and the Rules of Practice and Investigation for Technical Changes
The Commission amended Securities Act forms, Exchange Act rules and schedules, and the Rules of Practice and Investigation for technical changes that conform the regulatory text to the intent of the Commission and correct certain cross-references and typographical errors. This amendment will correct the regulations and facilitate public compliance with the rules. The amendment will become effective upon publication in the Federal Register. (Rel. 34-55146A; IC-27671A; 34-56135A; IC-27911A; 33-7759A; 33-7760A; 34-42054A; 34-42055A; 39-2378A; IC-24107A)
In the Matter of Robert T. Bassman, CPA
On March 18, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order) against Robert T. Bassman. The Order finds that Bassman is a certified public accountant in Michigan and that on March 7, 2008, a final judgment was entered against Bassman, permanently enjoining him from future violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, in the civil action entitled Securities and Exchange Commission v. Gary L. Monroe, et al., Civil Action Number 03-71840, in the United States District Court for the Eastern District of Michigan. The Order also finds that Bassman was ordered to pay $240,761.70 in disgorgement and prejudgment interest, but payment of all but $35,000.00 in disgorgement was waived and no civil money penalty was imposed based on sworn representations made by Bassman in his Statement of Financial Condition.
Based on the above, the Order suspends Bassman from appearing or practicing before the Commission pursuant to Rule 102(e)(3) of the Commission's Rules of Practice with the right to reapply after three years. Bassman consented to the issuance of the Order without admitting or denying any of the findings in the Order.
The Commission wishes to thank the U.S. Attorney's Office for the Eastern District of Michigan for its assistance in this matter. (Rel. 34-57516; AAE Rel. 2800; File No. 3-12993)
The Commission Settles Administrative Proceedings against Small Cap Fraudsters
On March 18, the Commission accepted the settlement offers made by Robert LoMonaco (LoMonaco) and Andrew Saksa (Saksa), respondents in previously instituted proceedings brought by the Commission. Respondent LoMonaco was Marx Toys & Entertainment Corp.'s (MRXT) former chief executive officer, and Saksa was the former director of mergers and acquisitions at Rubin Investment Group (RIG), a purported investment bank. The Commission found that in or around August 2003, LoMonaco knew that a former officer of MRXT engaged RIG and others to inflate MRXT's stock price, and that LoMonaco negotiated with RIG to obtain the funding that RIG promised to MRXT in exchange for the purportedly unrestricted stock RIG received. The Commission also found that in or around August 2003, in exchange for MXRT and The Classica Group, Inc. (Classica) stock, Saksa and others at RIG manipulated upward the price of both companies' stock.
The Commission's orders find that, among other things, despite the terms of MRXT's and Classica's Form S-8 registration statements filed with the Commission, and the requirements of Commission Form S-8, Saksa (as to both MRXT and Classica) and LoMonaco (as to MRXT) knew that RIG was a corporate entity, not a natural person, and therefore RIG was barred from receiving Form S-8 shares; that RIG did not intend to provide bona fide services to either MRXT or Classica; and that RIG and others engaged in efforts both to promote MRXT and Classica to potential investors and to raise capital for the issuers in exchange for the discounted Form S-8 shares RIG received. LoMonaco also knew that RIG and others engaged in efforts to artificially inflate the price of MRXT's stock in exchange for the Form S-8 shares, that Saksa and others manipulated the price of both companies' stock, and that the Form S-8 registration statements contained or incorporated by reference materially false or misleading statements and omissions which concealed the true nature of RIG's mission and the attendant compensation.
In accordance with their settlement offers, the Commission ordered that: (i) LoMonaco and Saksa cease and desist from committing or causing violations and any future violations of the relevant antifraud provisions; (ii) LoMonaco be barred from serving as an officer or director of a public company and from participating in any offering of a penny stock; and (iii) Saksa be barred from participating in any offering of a penny stock. LoMonaco and Saksa consented to the issuance of the orders without admitting or denying the Commission's findings. (Rels. 33-8903; 33-8904; 34-57517; 34-57518; File No. 3-11293)
Federal Court Permanently Enjoins Day-Trading Firm and its Principal From Future Broker-Dealer Registration and Securities Fraud Violations
The Commission announced today that on March 17, a federal court permanently enjoined Tuco Trading, LLC, an unregistered securities day-trading firm in La Jolla, California, and its principal, Douglas G. Frederick, from future violations of the broker-dealer registration and antifraud provisions of the federal securities laws. Tuco and Frederick consented to the entry of the permanent injunctions without admitting or denying the allegations of the Commission's complaint.
According to the Commission's complaint, the defendants provided securities day-trading capability to Tuco's over 250 traders who had approximately $10.2 million in reported equity balances at Tuco. They permitted traders to day-trade securities in Tuco's own brokerage accounts at registered broker-dealers through sub-accounts created at Tuco for each trader. The complaint alleged that Tuco provided traders with services not permitted at a registered broker-dealer. As alleged in the complaint, the defendants allowed traders to day-trade without meeting the $25,000 minimum equity requirement under NASD regulations for such trading. The complaint also alleges that for each $1 in the trader's sub-account, Tuco and Frederick allowed the traders at Tuco to use up to $20 of Tuco's equity, which had been invested by other traders, to purchase securities (20:1 buying power). NASD and NYSE regulations, however, only allow a day-trader to have 4:1 buying power.
The Commission's complaint also alleged that Tuco received transaction-based compensation for its traders' securities transactions, and Tuco's traders conducted substantial day-trading through Tuco's brokerage accounts both in dollar amounts and number of trades. As a result, Frederick earned substantial commissions on the trading as the registered representative for Tuco's main accounts at a registered broker-dealer. The complaint alleged that Frederick then used substantial amounts of his commissions to pay Tuco's operating expenses.
The complaint also alleged that the defendants' inaccurately reported to the traders their equity balances. Specifically, the complaint alleged that as of December 31, 2007, Tuco and Frederick had used about $3.62 million of the traders' approximately $10.2 million total equity to pay Tuco's expenses and to cover trader losses and that as of January 31, 2008, approximately a $1.35 million shortfall remained. As alleged in the complaint, Tuco and Frederick failed to disclose those details or that the traders' recovery of the shortfall in the traders' equity was dependent on Frederick's efforts.
The judgment was entered by the Honorable Dana M. Sabraw, United States District Judge for the Southern District of California. The judgment permanently enjoins Tuco and Frederick from future violations of Sections 10(b) and 15(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. The judgment also freezes Tuco's assets, appoints a permanent receiver over Tuco, and prohibits the destruction of documents. The judgment further orders Tuco and Frederick to pay disgorgement with prejudgment interest and civil penalties in amounts to be determined. On March 5, 2008, the Court issued emergency orders appointing a temporary receiver to monitor Tuco, prohibiting destruction of documents, and expediting discovery. For additional information, see Lit. Rel. No. LR-20480 (Mar. 6, 2008). [SEC v. Tuco Trading, LLC, and Douglas G. Frederick, Case No. 08 CV 0400 DMS BLM (S.D. Cal.)] (LR-20500)
SEC Charges W.P. Carey and Two Senior Executives in Fraudulent Payment Scheme
The Commission today filed settled securities fraud charges against W.P. Carey & Co., a manager of real estate investment trusts (REITs), and two of W.P. Carey's senior executives for paying undisclosed compensation to a brokerage firm that sold the REITs to investors. W.P. Carey did not disclose the payments to the broker-dealer, as it was required to do in the REITs' offering documents, and misrepresented the payments in the REITs' periodic filings.
REITs are entities that invest in different kinds of real estate or real estate related assets such as office buildings, retail stores, and hotels. The SEC complaint names as defendants W.P. Carey & Co.; John J. Park, formerly the chief financial officer of W.P. Carey, until yesterday a managing director of strategic planning at W.P. Carey and currently an employee in charge of strategic planning; Claude Fernandez, formerly the chief accounting officer and currently a managing director of W.P. Carey; and Carey Financial, LLC, a broker-dealer subsidiary of W.P. Carey.
To settle the SEC's charges, W.P. Carey agreed to pay approximately $30 million - approximately $20 million in disgorgement and interest and $10 million in penalties. Park's settlement includes a five-year bar from serving as an officer or director of a public company, and a $240,000 penalty. Fernandez's settlement includes a two-year suspension from appearing before the Commission as an accountant and a $75,000 penalty.
The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, makes several allegations.
Undisclosed Broker-Dealer Compensation: Between 2000 and 2003, W.P. Carey paid nearly $10 million in undisclosed compensation to a broker-dealer that sold shares of W.P. Carey's REITs to the public. The arrangement benefited not only the broker-dealer, but also W.P. Carey, because the broker-dealer's sales of the REIT shares increased the management and other fees that W.P. Carey received. Although W.P. Carey received the benefits of this arrangement, W.P. Carey paid the broker-dealer by using nearly $10 million in cash assets of the affiliated REITs.
W.P. Carey did not disclose the payments to investors. W.P. Carey, through Park and Fernandez, also requested sham invoices from the broker-dealer as a means to conceal the payments and circumvent applicable regulatory limitations on compensation to broker-dealers. By circumventing this limitation, W.P. Carey indirectly collected an excess of $6.4 million in fees and reimbursements from the REITs above what was legally permissible.
Undisclosed Payment for Proxy Solicitation Services: In 2002, W.P. Carey proposed to merge two of its affiliated REITs, subject to approval by shareholders of the REITs. W.P. Carey caused the two REITs to pay $100,000 to a broker-dealer, which had sold the REITs' shares to investors, to solicit shareholder votes in favor of the merger. In the registration statement and proxy materials for the merger, W.P. Carey failed to disclose the $100,000 payment that Park authorized to the broker-dealer for proxy solicitation services.
Unregistered Offering: In 2002 and 2003, W.P. Carey and Carey Financial offered and sold more than $235 million of one of the affiliated REIT's shares without a registration statement being in effect, in violation of the registration provisions of the federal securities laws.
Other Disclosure Failures: W.P. Carey also failed to comply with other disclosure requirements. In filings with the Commission, W.P. Carey failed to disclose the bankruptcy of a company at which a W.P. Carey senior executive was previously the CFO. In addition, prior to 2004, the majority of executive officers and directors of the affiliated REITs failed to file forms required under Section 16(a) of the Securities Exchange Act of 1934, and the REITs' annual proxy statements and reports falsely stated there were no Section 16(a) delinquent filings.
The defendants agreed to settle the Commission's charges without admitting or denying the allegations of the complaint. W.P. Carey agreed to be permanently enjoined from violating the antifraud, reporting, proxy, books and records, and registration provisions of the federal securities laws - namely, Sections 5 and 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b), 13(a), 13(b)(2)(A), and 14(a) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9. W.P. Carey also agreed to pay a $10 million civil penalty and to pay $19,978,612.37 in disgorgement and prejudgment interest. The entire disgorgement and prejudgment interest will be distributed to the affected REITs. Carey Financial agreed to be permanently enjoined from violating Section 5(a) of the Securities Act.
Park agreed to be permanently enjoined from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 14a-9, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Rules 12b-20, 13a-1, and 13a-13. Park also agreed to consent to a bar from acting as an officer or director of any public company for two years, and to pay a civil penalty of $240,000. Fernandez agreed to be permanently enjoined from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(b)(5) of the Exchange Act, and Exchange Act Rule 13b2-1, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. Fernandez also agreed to pay a civil penalty of $75,000. Fernandez has also consented to the issuance of an SEC Order based on the entry of the injunctions that will suspend him from appearing or practicing before the SEC as an accountant for two years.
All of the settlements are subject to court approval. The Commission's investigation is continuing. [SEC v. W.P. Carey & Co. LLC et al., 08 Civ. 2846 (JSR) (S.D.N.Y.)] (LR-20501)
INVESTMENT COMPANY ACT RELEASES
NETS Trust, et al.
An order has been issued on an application filed by NETS Trust, et al. The order permits: (a) certain registered open-end management investment companies and their series to issue shares (NETS) that can be redeemed only in large aggregations; (b) secondary market transactions in NETS to occur at negotiated prices; (c) dealers to sell NETS to purchasers in the secondary market unaccompanied by a prospectus when prospectus delivery is not required by the Securities Act of 1933; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series; (e) certain series to pay redemption proceeds more than seven days after the tender of NETS for redemption under certain circumstances; and (f) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire NETS. (Rel. IC-28195 - March 17)
Proposed Rule Changes
The New York Stock Exchange filed a proposed rule change (SR-NYSE-2008-17) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to adopt new initial and continued listing standards to list special purpose acquisition companies. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57499)
The National Association of Securities Dealers (n/k/a Financial Industry Regulatory Authority, Inc.) filed a proposed rule change and Amendment No. 1 thereto (SR-NASD-2007-52) relating to amendments to the NASD Rule 9700 Series to streamline the procedural rules applicable to general grievances related to FINRA automated systems. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57504)
A proposed rule change (SR-ISE-2007-77), as modified by Amendment Nos. 1 and 2 thereto, relating to complex orders has been filed by the International Securities Exchange under Section 19(b)(2) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57507)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by the Municipal Securities Rulemaking Board relating to amendment to Rule A-3, on membership on the Board, and Rule A-4, on meetings of the Board (SR-MSRB-2008-02) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57500)
A proposed rule change (SR-Amex-2008-18) filed by the American Stock Exchange to create a delta hedging exemption from equity options position limits has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57502)
A proposed rule change (SR-BSE-2008-10) filed by the Boston Stock Exchange to create a delta hedging exemption from equity options position limits has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57503)
A proposed rule change (SR-ISE-2008-27) filed by the International Securities Exchange implementing Phase II of the Penny Pilot Program expansion has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57508)
Accelerated Approval of Proposed Rule Change
A proposed rule change (SR-Amex-2008-19) filed by the American Stock Exchange relating to the retroactive application of the Options Fee Cap Pilot Program for Dividend Strategies, Merger Spreads, and Short Stock Interest Spreads has been approved on an accelerated basis pursuant to Section 19(b)(2) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 17. (Rel. 34-57506)
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