Former aaiPharma Inc. Executive David Hurley Agrees to Pay $50,000 Civil Penalty in Settlement of SEC Litigation
The Commission today announced a final resolution of the Commission's civil action against David M. Hurley (Hurley), former chief operating officer of aaiPharma, Inc. (aaiPharma). Pursuant to a final judgment entered by the Court on May 5, 2008, Hurley was ordered to pay a civil penalty of $50,000. In June 2005, without admitting or denying the allegations in the complaint, Hurley consented to a partial resolution of the case, agreeing to entry of a judgment enjoining him from violating or aiding and abetting violations of the antifraud, recordkeeping, internal controls, and other provisions of the federal securities laws (Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a-11, 13a-13, and 13b2-1) and to be permanently barred from acting as an officer or director of any public company.
In the Commission's complaint filed against Hurley in June 2005, the Commission alleged that prior to aaiPharma's 2003 fiscal third quarter end, Hurley arranged fraudulent sales transactions with customers to create the illusion that aaiPharma had met or exceeded its sales goals for the quarter. The complaint alleged that these fraudulent sales were reflected in aaiPharma's financial statements included in filings publicly disseminated in November 2003 and February 2004. The complaint further alleged that in the fourth quarter of 2003, Hurley arranged a fraudulent sales transaction with an aaiPharma customer. According to the complaint, although the transaction gave the customer the right to return the product, aaiPharma falsely recorded it as a final sale. The complaint alleged that as a result, aaiPharma reflected fraudulent sales of approximately $8 million in a Form 8-K filed with the Commission in February 2004 that announced the company's financial results for its fiscal fourth quarter and fiscal year ended 2003. [SEC v. David M. Hurley, Civil Action No. 1:05CV01306 (JR) (D.D.C.)] (LR-20566; AAE Rel. 2824)
Thomas J. Gerbasio and Beacon Rock Capital Sentenced in Criminal Action Charging Deceptive Market Timing
Resolves First U.S. Criminal Action Against a Hedge Fund for Deceptive Market Timing
The Commission announced today that Beacon Rock Capital LLC (Beacon Rock), a hedge fund located in Portland, Oregon, and Thomas J. Gerbasio (Gerbasio), a former registered representative with a registered broker-dealer based in Philadelphia, have been sentenced in connection with the first U.S. criminal case brought against a hedge fund for deceptive market timing. On May 7, 2008, Judge Eduardo C. Robreno of the United States District Court for the Eastern District of Pennsylvania, sentenced Gerbasio to one year and one day in prison, two years of supervised release, and ordered him to pay a fine of $7,500. Judge Robreno further sentenced Beacon Rock to three years of probation, and ordered the hedge fund to forfeit $475,905 and to pay a fine of $600,000.
The criminal action began with an Information filed on March 20, 2007, by the U.S. Attorney for the Eastern District of Pennsylvania, charging Beacon Rock and Gerbasio with securities fraud. According to the Information, from December 1999 through November 2003, Gerbasio, while associated with two brokers registered with the Commission, provided brokerage services to Beacon Rock. The Information charged that the primary purpose of this relationship was to permit Beacon Rock, whose primary trading strategies involved market timing, to evade and circumvent controls implemented by mutual funds seeking to restrict market timing or other excessive trading. Gerbasio and others at his direction, engaged in a number of deceptive and fraudulent practices designed to conceal the identity of Beacon Rock and the nature of its trading activity, resulting in more than 26,000 Beacon Rock market timing trades. The U.S. Attorney charged Beacon Rock and Gerbasio with, and the defendants pled guilty to, securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5].
In the civil injunctive action filed by the Commission on April 21, 2005, against Gerbasio and another defendant, the Commission alleged that from at least August 2002 until October 2003, Gerbasio defrauded hundreds of mutual funds and their shareholders by engaging in deceptive market timing practices for two hedge fund customers, with the result that thousands of market timing trades were placed that would otherwise have been rejected by the fund companies. On March 30, 2006, the U. S. District Court for the Eastern District of Pennsylvania entered a Final Judgment by consent, permanently enjoining Gerbasio from violations of Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5], and ordering Gerbasio to pay disgorgement together with prejudgment interest in the amount of $540,044, but waiving payment of all but $100,000. The Court did not impose a civil penalty, based on Gerbasio's sworn financial statements submitted to the Commission.
On April 10, 2006, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions barring Gerbasio from association with any broker or dealer. This administrative order was based on the permanent injunction entered in the civil action.
For further information, see Litigation Release Nos. 19647 (April 10, 2006) and 19197 (April 21, 2005); and Administrative Proceeding No. 3-11908, Release No. 34-53622 (April 10, 2006). [U.S. v. Beacon Rock Capital, LLC and Thomas Gerbasio, Criminal Action No. 07-00142 (E.D. Pa.); SEC v. Gerbasio, Civil Action No. 05 1833 (E.D. Pa.)] (LR-20567)
SEC Settles Fraud Action Against Former U.S. Foodservice Vice President Brian Spears
The Commission today filed a settled civil injunctive action against Brian Spears, a former Vice President of Purchasing at U.S. Foodservice (USF). The complaint alleges that Spears and others at USF, then a subsidiary of Royal Ahold (Koninklijke Ahold N.V.) (Ahold), engaged in a large-scale fraud that, for fiscal years 2001 and 2002, materially overstated operating income by an aggregate amount of approximately $700 million in Commission filings and other public announcements.
The Commission's complaint further alleges that Spears and others at USF induced third parties to confirm false information to USF's outside auditors. Spears and others at USF did this to make it falsely appear that amounts recorded on USF's books and records as accounts receivable were earned. As alleged in the complaint, Spears called vendors at USF's 2001 fiscal year-end and 2002 fiscal year-end and worked with others at USF to convince the vendors to sign the confirmation letters and return them to USF's auditors.
Spears has agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to the entry of a final judgment permanently enjoining him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and from 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 13b2-2 thereunder. The final judgment orders disgorgement of $45,000 and prejudgment interest thereon in the amount of $15,547, but waives payment of all disgorgement and prejudgment interest and does not impose a civil penalty, based on the sworn representations in Spears' Statement of Financial Condition and other documents and information submitted to the Commission. The final judgment also bars Spears from serving as an officer or director of a public company for five years. The settlement is subject to approval by the Court. [SEC v. Brian Spears, Civil Action No.08-00820 (CCK) (D.D.C.)] (LR-20568; AAE Rel. 2825)
SEC Recovers Over $ 1.2 Million in Settled Insider Trading Action Relating to Royal Ahold - U.S. Foodservice Merger
The Commission today filed a settled civil injunctive action against John Turchetta of Naples, Florida. The complaint alleges that Turchetta purchased securities of U.S. Foodservice (USF) and caused others to trade, after he acquired material, nonpublic information concerning a proposed tender offer by Royal Ahold (Koninklijke Ahold N.V.) for the outstanding shares of USF common stock. Turchetta received the inside information from a USF vendor, who had been tipped by a senior officer of the company.
Turchetta has agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to the entry of a final judgment permanently enjoining him from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The final judgment also orders Turchetta to pay disgorgement of $553,000 plus prejudgment interest thereon in the amount of $162,069, as well as a civil penalty of $553,000, for a total of $1,268,069. The settlement is subject to approval by the Court. SEC v. John Turchetta, Civil Action No. 08-00819 (JDB) (D.D.C.)] (LR-20569)
Court Enters Permanent Injunction and Penny Stock Bar Against Jeffrey Hayden in Market Manipulation Case
The Commission today announced that the Honorable John D. Bates of the United States District Court for the District of Columbia entered a Final Judgment of permanent injunction and other relief, including a bar against participating in offerings of penny stocks, against Jeffrey A. Hayden on May 7, 2008. Without admitting or denying the Commission's allegations, Hayden consented to the entry of the Final Judgment. The judgment settles the Commission's claims against Hayden in a civil action filed on August 16, 2007, in which the Commission alleged that Hayden had participated in a fraudulent scheme to manipulate the stock price of Nationwide Capital Corporation, a now-defunct company whose shares traded on the Over-the-Counter Bulletin Board.
The Commission's complaint alleged that, in August and September 2002, Hayden, Marc Duchesne, and others carried out a scheme to manipulate the price of Nationwide's stock. The scheme was orchestrated by Duchesne, and began with a matched trade between Duchesne and Hayden that artificially inflated Nationwide's stock price from pennies to $9.35 per share. The Complaint further alleged that, thereafter, Duchesne, Hayden, and others bought or sold Nationwide shares at inflated prices to increase the price of Nationwide stock, to generate volume, and to stimulate market demand for the manipulated shares. The scheme collapsed on October 1, 2002, when the Commission suspended trading in Nationwide securities.
The Final Judgment (i) permanently enjoins Hayden from future violations of the general antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933, and (ii) bars him from participating in offerings of penny stocks. Hayden was liable for disgorgement of $290,798, together with prejudgment interest of $116,330, but payment of these amounts was waived based upon Hayden's sworn Statement of Financial Condition. A civil penalty was not imposed for the same reason.
The Commission acknowledges the assistance of the United States Attorney's Office for the District of Columbia and the Federal Bureau of Investigation, which conducted a separate, parallel criminal investigation. [SEC v. Marc T. Duchesne, Jeffrey A. Hayden, et al., Civil Action No. 07-cv-01475 (JDB) D.D.C.] (LR-20570)
Approval of Proposed Rule Change
The Commission approved a proposed rule change (SR-NSCC-2007-12) filed by the National Securities Clearing Corporation under Section 19(b)(1) of the Exchange Act to provide a new Alternative Investments Products service. Publication is expected in the Federal Register during the week of May 12. (Rel. 34-57813)
Accelerated Approval f Proposed Rule Change
The Commission granted accelerated approval to a proposed rule change filed by the Philadelphia Stock Exchange (SR-Phlx-2008-34), consolidating into a single rule certain requirements for products traded on the exchange pursuant to unlisted trading privileges. Publication is expected in the Federal Register during the week of May 12. (Rel. 34-57806)
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