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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2008-65
April 3, 2008

ENFORCEMENT PROCEEDINGS

In the Matter of the Chicago Stock Exchange

The Securities and Exchange Commission has accepted an amended Offer of Settlement from the Chicago Stock Exchange (Exchange) and issued an Amended Order thereby amending its September 30, 2003 Order against the Exchange in order to alter the terms of the Exchange's undertaking regarding the composition of its Regulatory Oversight Committee (the Committee). Under the terms of the 2003 Order, the Exchange was required to maintain a seven-person Committee consisting of five (5) Public Governors (now termed Public Directors), one (1) On-Floor Member Governor (now termed a Participant Director) and one (1) Off-Floor Member Governor (now termed a Participant Director)

The Amended Order allows the Exchange to alter the composition of the Committee so that it is now required to be composed of at least five (5) Public Directors, and up to two (2) non-voting Participant Directors. (Rel. 34-57605; File No. 3-11282)


SEC Charges Houston Company with Sales of Fraudulent Securities to Mostly Elderly Investors

On March 21, 2008, the Commission filed a civil action in Dallas federal court against W Financial Group, LLC (WFG), Adley Abdulwahab of Spring, Texas, Michael K. Wallens, Sr. of Spring, Texas, and Michael K. Wallens, Jr. of Plano, Texas.

The Commission charges that the defendants fraudulently offered unregistered securities known as Secured Debt Obligations (SDOs), which are notes purportedly secured by automobile financing receivables created or purchased by defendants. The SEC's complaint alleges that from September 2006 to February 2007, defendants raised at least $17.9 million from the sale of SDOs to at least 182 investors located primarily in Texas. WFG investors were lured into purchasing SDOs through a series of misrepresentations and omissions that portrayed SDOs to be a higher-yielding, but equally safe, alternative to bank CDs. The Complaint alleges that defendants' offering materials asserted that SDOs were insured or reinsured by Lloyd's of London and The Republic Group, when the actual coverage was miniscule, at best. WFG's offering materials also represented that WFG would keep investor funds separate and apart from its property and would use investor funds for limited, specially enumerated purposes. Instead, defendants allegedly commingled investor funds and used millions to purchase the majority interest in an electric power company and fund its operations, to buy and develop residential real estate, and to buy unauthorized investment vehicles, such as a life settlement contract.

The SEC's complaint alleges that defendants violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. With the consent of the Defendants, the Court appointed a Special Master to take immediate custody of all cash assets obtained from or derived from investor funds; oversee the sale of WFG's assets; authorize certain transactions involving the sale of assets or expenditures of funds; hold all cash and monies generated from the sale of assets; and distribute proceeds of the asset sales to investors. [SEC v. W Financial Group, LLC, Adley H. Abdulwahab, Michael K. Wallens, Sr. and Michael K. Wallens, Jr., Civil Action No. 3-08CV0499-N (U.S.D.C., Northern District of Texas, Dallas Division)] (LR-20515)


Commission Files Fraud Charges against United Kingdom-Based Hedge Fund Adviser and its Chief Executive Officer for Defrauding United States Mutual Funds Through Late Trading and Deceptive Market Timing

On April 3, the Commission filed a civil action in the U.S. District Court for the Southern District of New York against United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and its Chief Executive Officer, Lewis Chester (Chester). The complaint alleges that PCM and Chester orchestrated a scheme to defraud mutual funds in the United States and their shareholders through late trading and deceptive market timing. PCM's advisory client, Pentagon Special Purpose Fund, Ltd. (Pentagon Fund), obtained approximately $62 million in illicit profits through this scheme, at the expense of U.S. mutual funds and their shareholders. The Commission named the Pentagon Fund as a relief defendant.

The Commission's complaint alleges the following. From approximately June 1999 through September 2003, PCM actively traded U.S. mutual funds through Pentagon Fund's accounts at numerous broker-dealers in the United States. PCM and Chester routinely engaged in late trading of U.S. mutual funds. PCM placed orders on behalf of the Pentagon Fund, to buy, redeem, or exchange mutual fund shares after the 4:00 p.m. Eastern Time (ET) market close while still receiving the current day's mutual fund price. This illegal practice enabled Pentagon Fund to profit - at the expense of other shareholders in the U.S. mutual funds - from market events that occurred after 4:00 p.m. ET, but that were not reflected in the price that Pentagon Fund paid for the mutual fund shares.

PCM and Chester also used deceptive techniques to market time U.S. mutual funds. For example, PCM opened numerous accounts for the Pentagon Fund at various U.S. broker-dealers, and split Pentagon Fund trades among these multiple accounts to hide the extent of the Pentagon Fund's trading from mutual fund companies. PCM also used multiple accounts so that when a U.S. mutual fund detected market timing and informed the Pentagon Fund to stop, PCM would simply transfer funds to a new Pentagon Fund brokerage account that the U.S. mutual fund was unaware of, and Pentagon Fund would then resume market timing the same mutual fund.

PCM, Chester, and the Pentagon Fund benefited from this late trading and deceptive market timing scheme at the expense of the U.S. mutual funds and their shareholders. Pentagon Fund earned illicit profits of approximately $62 million. PCM and Chester obtained ill-gotten gains, including performance and management fees for managing the Pentagon Fund.

As a result of this conduct, PCM and Chester violated Section 17(a) of the Securities Act of 1933, and violated, or aided and abetted violations of, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint seeks as relief a final judgment: (i) permanently enjoining PCM and Chester; (ii) ordering PCM, Chester, and the Pentagon Fund to disgorge their ill-gotten gains and to pay prejudgment interest; and (iii) imposing civil money penalties against PCM and Chester. [SEC v. Pentagon Capital Management PLC, 08 CV 03324 (RWS) (SDNY)] (LR-20516)


INVESTMENT COMPANY ACT RELEASES

Pruco Life Insurance Company, et al.

An order has been issued under Section 6(c) of the Investment Company Act, as amended (Act) to Pruco Life Insurance Company (Pruco Life), Pruco Life Insurance Company of New Jersey (Pruco Life of New Jersey, and collectively with Pruco Life, the Insurance Companies), Pruco Life Flexible Premium Variable Annuity Account (Pruco Life Account), Pruco Life of New Jersey Flexible Premium Variable Annuity Account (Pruco Life of New Jersey Account, and collectively with Pruco Life Account, the Accounts), and Prudential Annuities Distributors, Inc. (PAD, and collectively with the Insurance Companies, and the Accounts, the Applicants) providing exemptions from Sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to permit, under specified circumstances, the recapture of certain credits previously applied to purchase payments made under (1) the Prudential Premier Variable Annuity X Series (X Series Contract), or (2) variable annuity contracts issued by the Insurance Companies in the future that are substantial similar in all material respects to the X Series Contract (Future Contracts). Applicants also request that the order extend to (1) any separate account currently existing or established in the future by the Insurance Companies (Future Account) to support Future Contracts, and (2) any FINRA member broker-dealer controlling, controlled by, or under common control with the Insurance Companies, whether existing or created in the future, that serves as a distributor or principal underwriter of the X Series Contract offered through the Accounts or any Future Account. (Rel. IC-28231 - April 1)


Cuna Mutual Insurance Society, et al.

An order has been issued under Section 6(c) of the Investment Company Act of l940, as amended (Act) to CUNA Mutual Insurance Society (Insurance Company), CUNA Mutual Variable Annuity Account (Account), and CUNA Brokerage Services, Inc. (CUNA Brokerage, and collectively with the Insurance Company, and the Account, the Applicants) providing exemptions from Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to permit, under specified circumstances, the recapture of certain credits previously applied to purchase payments made under (1) certain flexible premium deferred variable annuity contracts issued by the Insurance Company (Contracts), or (2) variable annuity contracts issued by the Insurance Company in the future that are substantial similar in all material respects to the Contracts (Future Contracts) and are funded through the Account or other separate account of the Insurance Company (Future Accounts). Applicants also request that the order extend to any FINRA member broker-dealer which in the future may act as a distributor of, and/or principal underwriter for, the Contracts or Future Contracts offered through the Account or Future Accounts. (Rel. IC-28232 - April 1)


Prudential Annuities Life Assurance Corporation, et al.

An order has been issued under Section 6(c) of the Investment Company Act of l940, as amended (Act) to Prudential Annuities Life Assurance Corporation (PALAC), Prudential Annuities Life Assurance Corporation Variable Account B (Account), and Prudential Annuities Distributors, Inc. (PAD, and collectively with the Insurance Company, and the Accounts, the Applicants) providing exemptions from Sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to permit, under specified circumstances, the recapture of certain credits previously applied to purchase payments made under (1) the XTRA Credit Six and Optimum Plus variable annuity contract issued by PALAC (Contracts), or (2) variable annuity contracts issued by PALAC in the future that are substantial similar in all material respects to the Contracts (Future Contracts). Applicants also request that the order extend to (1) any separate account currently existing or established in the future by PALAC (Future Account) to support Future Contracts, and (2) any FINRA member broker-dealer, whether existing or created in the future, that serves as a distributor or principal underwriter of the Contracts offered through the Account or any Future Account. (Rel. IC-28233 - April 1)


SELF-REGULATORY ORGANIZATIONS

Proposed Rule Change

The NASDAQ Stock Market filed a proposed rule change (SR-NASDAQ-2007-067) under Rule 19b-4 of the Securities Exchange Act of 1934 to establish an Imbalance Cross. Publication is expected in the Federal Register during the week of April 7. (Rel. 34-57595)


Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by the Boston Stock Exchange relating to position and exercise limits on the Boston Options Exchange facility (SR-BSE-2008-19) has become immediately 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 April 7. (Rel. 34-57598)

A proposed rule change filed by the NASDAQ Stock Market to establish fees for trading on The NASDAQ Options Market (SR-NASDAQ-2008-027) 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 April 7. (Rel. 34-57599)

A proposed rule change (SR-CBOE-2008-35) filed by the Chicago Board Options Exchange to increase the class quoting limit in one option class 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 April 7. (Rel. 34-57602)


SECURITIES ACT REGISTRATIONS


RECENT 8K FILINGS

 

http://www.sec.gov/news/digest/2008/dig040308.htm


Modified: 04/03/2008