RULES AND RELATED MATTERS
Technical Amendments to Definitions of Terms and Exemptions Relating to the "Broker" Exceptions for Banks
The Board and the Commission jointly adopted technical amendments to Regulation R, which the Agencies jointly adopted in September 2007. Regulation R implements certain of the exceptions for banks from the definition of the term "broker" in Section 3(a)(4) of the Securities Exchange Act of 1934 (Exchange Act), as amended by the Gramm-Leach-Bliley Act (GLBA). The technical amendments correct cross-references and other typographical errors in the regulation. Publication of the order is expected in the Federal Register during the week of April 14. (Rel. 34-56501A)
Commission Files Fraud Charges Against United Kingdom-Based Hedge Fund Adviser for Defrauding United States Mutual Funds Through Late Trading and Deceptive Market Timing
On April 10, 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 Headstart Advisers Limited (HAL) and its "Chief Investment Adviser," Najy N. Nasser. The complaint alleges that HAL and Nasser orchestrated a scheme to defraud mutual funds in the United States and their shareholders through late trading and deceptive market timing. HAL's advisory client, Headstart Fund Ltd., obtained approximately $198 million in illicit profits through this scheme, at the expense of U.S. mutual funds and their shareholders. The Commission named the Headstart Fund as a relief defendant.
The Commission's complaint alleges the following. From approximately September 1998 through September 2003, HAL actively traded U.S. mutual funds through Headstart Fund's accounts at numerous broker-dealers in the United States. HAL routinely engaged in late trading of U.S. mutual funds. HAL placed orders on behalf of its client, the Headstart 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 Headstart 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 Headstart Fund paid for the mutual fund shares.
HAL and Nasser also used deceptive techniques to market time U.S. mutual funds. For example, HAL opened numerous accounts on behalf of Headstart Fund at various U.S. broker-dealers, and split Headstart Fund trades among multiple accounts to keep the size of the trades below the threshold that mutual funds monitored in order to conceal the extent of Headstart Fund's trading from U.S. mutual fund companies. HAL also used multiple accounts so that when a U.S. mutual fund company detected Headstart Fund's market timing and informed the U.S. broker-dealers through whom the trades had been placed to stop, HAL would simply transfer funds to a new brokerage account of which the U.S. mutual fund company was not yet unaware, and then resume market timing within the same U.S. mutual fund company.
HAL, Nasser, and Headstart Fund benefited from this late trading and deceptive market timing at the expense of other shareholders in the U.S. mutual funds. Headstart Fund earned illicit profits of approximately $198 million from its late trading and deceptive market timing of U.S. mutual funds. HAL and Nasser obtained ill-gotten gains from the late trading and deceptive market timing scheme through, among other things, their receipt of performance and management fees for managing the Headstart Fund.
As a result of this conduct, HAL and Nasser 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 HAL and Nasser; (ii) ordering HAL, Nasser, and the Headstart Fund to disgorge their ill-gotten gains and to pay prejudgment interest; and (iii) imposing civil money penalties against HAL and Nasser. [SEC v. Headstart Advisers Limited, 08 CV 3484 (DAB) (SDNY)] (LR-20524)
SEC Charges Compass Capital Group, Inc., its Principal, Mark Lefkowitz, and Former Officers and Directors of 21st Century Technologies, Inc. in Unlawful Public Offering and with Securities Fraud
On April 10, the Commission charged Compass Capital Group, Inc., Mark A. Lefkowitz, Alvin L. Dahl, John R. Dumble, John C. Hopf, Kevin D. Romney, and Shane H. Traveller with engaging in an unlawful public offering of the securities of 21st Century Technologies, Inc., a former Business Development Company; making materially false and misleading statements in the offer and sale of 21st Century's securities; and aiding and abetting reporting, record-keeping, and internal controls violations by 21st Century.
The Commission's complaint alleges that, in 2003, defendants Romney, Hopf, Lefkowitz, and Compass Capital employed a scheme to evade the registration requirements of the federal securities laws for a public offering of 21st Century securities. Purporting to act pursuant to a registration exemption under Regulation E of the Securities Act of 1933, these defendants structured a public offering in a manner that generated excess and unlawful proceeds and as a result, the offering failed to qualify for the Regulation E exemption. Further, these defendants fraudulently deprived the public of material information about Compass Capital's and others' roles as underwriters for the offering and how the underwriters were compensated for distributing 21st Century's securities.
In particular, the Commission alleges Compass Capital and its affiliates, including Lefkowitz and Hopf, bought shares at an undisclosed discount from 21st Century, with a view to distributing them in a public offering, thereby acting as undisclosed underwriters for 21st Century's public offering. As a result, the offering raised more than $5 million in a twelve-month period, the maximum amount permitted under Regulation E. The unregistered sales of 21st Century's shares therefore violated the Securities Act's registration requirements.
The complaint further alleges that Romney, Dumble, and Traveller violated the antifraud provisions of the federal securities laws by publishing materially false and misleading statements by 21st Century and that Dahl, Dumble, and Traveller aided and abetted 21st Century's reporting, record-keeping, and internal controls violations. 21st Century reported false and materially misleading valuations and descriptions of several of its portfolio investments and failed to devise and maintain a system of internal accounting controls sufficient to assure that only authorized transactions were executed and that transactions were recorded accurately.
The Commission's complaint also alleges that Lefkowitz and Compass Capital each acted as a broker and dealer in connection with 21st Century's public offering, although neither Lefkowitz nor Compass Capital was registered with the Commission as a broker-dealer
The Commission seeks a final judgment permanently enjoining defendants Lefkowitz, Dumble, Romney, and Traveller from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule l0b-5 thereunder; permanently enjoining defendants Romney and Traveller from violating Section 17(a) of the Securities Act; permanently enjoining defendants Compass Capital, Lefkowitz, Romney, and Hopf from violating Section 5(a) and 5(c) of the Securities Act; permanently enjoining defendants Compass Capital and Lefkowitz from violating Section 15(a) of the Exchange Act; permanently enjoining defendants Dumble, Traveller, and Dahl from violating Section 13(a) of the Exchange Act and Rules 12b-20 (Dumble, Traveller, and Dahl), 13a-1 (Traveller and Dahl), 13a-11 (Dumble), and 13a-13 (Dumble, Traveller, and Dahl); permanently enjoining defendant Traveller from violating Section 13(b)(5) of the Exchange Act and Rule 13b2-1; permanently enjoining defendants Dumble, Romney, and Dahl from violating Rule 13a-14 of the Exchange Act, enacted as part of the Sarbanes-Oxley Act of 2002; permanently enjoining defendants Compass Capital and Lefkowitz, from violating Section 13(d) of the Exchange Act and Rule 13d-1; and ordering all of the defendants to pay civil penalties and disgorgement of any ill-gotten gains.
The Commission also seeks entry of an order barring Dumble, Romney, and Traveller from serving as officers or directors of any public company, and barring all defendants from participating in any future offerings of penny stock. [SEC v. Compass Capital Group, Inc., Mark A. Lefkowitz, Alvin L. Dahl, John R. Dumble, John C. Hopf, Kevin D. Romney, and Shane H. Traveller, Case No. 2:08-CV-00457 (D. Nev.)] (LR-20525)
INVESTMENT COMPANY ACT RELEASES
ALPS Advisers, Inc., et al.
A notice has been issued giving interested persons until April 30, 2008, to request a hearing on an application filed by ALPS Advisers, Inc., et al., for an order to permit series of open-end management investment companies whose portfolios will consist of the securities of an equity securities index to issue shares that can be redeemed only in large aggregations and would trade in the secondary market at negotiated prices. The order would allow dealers to sell shares of the series in the secondary market unaccompanied by a prospectus when prospectus delivery is not required by the Securities Act of 1933, permit certain affiliated persons of the series to deposit securities into and receive securities from the series, and permit the series to pay redemption proceeds more than seven days after the tender of shares for redemption under certain circumstances. The order also would permit certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire shares of the series. (Rel. IC-28235 - April 9)
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