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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2008-95
May 15, 2008

COMMISSION ANNOUNCEMENTS

Office of the Chief Accountant Names Academic Fellows

Conrad W. Hewitt, the Commission's Chief Accountant, announced today the selection of Donal Byard, Susan Krische, and Roger Martin as Academic Accounting Fellows for fixed terms beginning this summer.

"Academic fellows have been very valuable to the Office of the Chief Accountant, and I look forward to working with the incoming academic fellows," said Mr. Hewitt.

Academic Accounting Fellows serve as research resources for Commission staff by interpreting and communicating research materials as they relate to the SEC. In addition, Academic Accounting Fellows have been assigned to ongoing projects in the Chief Accountant's office that include rulemaking, serving as a liaison with the professional accounting standards-setting bodies, and consulting with registrants on accounting, auditing, independence and reporting matters.

Mr. Byard is an Associate Professor of Accounting in the Zicklin School of Business of Baruch College, part of the City University of New York (CUNY). He earned his Ph.D. from the University of Maryland in 1998, a B.B.S. degree in Accounting from the University of Limerick, and an M.B.S. degree in Finance from University College Dublin. Mr. Byard teaches both undergraduate and graduate financial accounting. His research primarily focuses on the role of financial analysts as information intermediaries in capital markets, specifically their processing of financial disclosures. His work has been published in the Journal of Accounting Research, The Accounting Review, the Journal of Accounting and Public Policy, and the Journal of Accounting, Auditing, and Finance. His current research focuses on financial analysts' use of voluntary disclosures, the impact of alternative voluntary disclosures on trading volume around earnings announcements, and issues relating to IFRS adoption in Europe.

Ms. Krische is an Assistant Professor of Accountancy at the University of Illinois at Urbana-Champaign, where she teaches both undergraduate and Ph.D. students. Effective August 16th, Ms. Krische will be promoted to the rank of Associate Professor of Accountancy at the University of Illinois. In her research, she focuses on how financial accounting information affects investors' and analysts' judgments. Bridging financial accounting and behavioral finance issues, her research has been published in top academic journals, including The Accounting Review and The Journal of Finance. She currently serves on the editorial boards for Contemporary Accounting Research and Behavioral Research in Accounting, as well as on the American Academic Association's Competitive Manuscript Award Committee. In addition, Ms. Krische is qualified as a Chartered Accountant in Canada, having worked at Ernst & Young and having lectured at the University of Waterloo prior to earning her Ph.D. from Cornell University.

Mr. Martin is an Associate Professor of Commerce and Director of the M.S. in Accounting Program at the University of Virginia's McIntire School of Commerce. His research focuses primarily on how auditing and the role of auditors affect financial statement quality. Mr. Martin's research has been published in top accounting journals including The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research and Auditing: A Journal of Practice and Theory. He has been active in the Auditing Section of the American Accounting Association, serving on and chairing several committees, including the Auditing Standards Committee. He teaches financial accounting and graduate auditing courses at McIntire. Mr. Martin earned his B.S. in Accounting and Finance at the University of Kansas and his Ph.D. from the University of Texas at Austin. Prior to joining the McIntire School of Commerce Mr. Martin served on the faculties at Southern Methodist University, Michigan State University and Indiana University.

Mr. Byard, Ms. Krische and Mr. Martin will replace three current Academic Accounting Fellows. Stephen Brown will be joining the accounting faculty at the University of Maryland at College Park, William Kinney will return to the University of Texas at Austin, and K. Ramesh will return to Michigan State University. (Press Rel. 2008-89)


Commission Meetings

Closed Meeting - Thursday, May 22, 2008 - 2:00 p.m.

The subject matter of the closed meeting scheduled for May 22, 2008, will be: formal orders of investigation; institution and settlement of injunctive actions; institution and settlement of administrative proceedings of an enforcement nature; resolution of litigation claims; adjudicatory matters; and post-argument discussions.

At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400.


RULES AND RELATED MATTERS

Definition of "Eligible Portfolio Company" under the Investment Company Act of 1940

On May15, the Commission issued a release adopting an amendment to Rule 2a-46 under the Investment Company Act of 1940 (Investment Company Act). Rule 2a-46 defines "eligible portfolio company" to include all private domestic operating companies and domestic operating companies whose securities are not listed on a national securities exchange (Exchange). The amendment expands the definition of eligible portfolio company also to include certain companies that list their securities on an Exchange. The amendment more closely aligns the definition of eligible portfolio company, and the investment activities of business development companies, with the purpose that Congress intended.

The amendments will become effective 60 days after publication in the Federal Register. (Rel. IC-28266)


ENFORCEMENT PROCEEDINGS

SEC v. Watermark Financial Services Group, Inc., et al.

The Commission announced that on May 15, 2008, it filed a civil injunctive action in the United Stated District Court for the Western District of New York and a motion for a temporary restraining order and asset freeze against defendants Watermark Financial Services Group, Inc. (Watermark Financial), Watermark M-One Holdings, Inc. (Watermark Holdings), M-One Financial Services, LLC (M-One), Watermark Capital Group, LLC (Watermark Capital), Guy W. Gane, Jr., and Lorenzo Altadonna and an asset freeze against relief defendants Guy W. Gane, III, Jenna Gane, and Denkon, Inc. The Commission is also seeking an Order directing the defendants and relief defendants to provide verified accountings and prohibiting the destruction, concealment or alteration of documents.

The SEC's complaint alleges that, from at least May 2005 to the present, Gane and M-One orchestrated a securities offering fraud that has raised at least $5.7 million from approximately 90 investors, including a number of senior citizens, through the sale of debentures and promissory notes issued by the various entity defendants. Gane is a principal of each of the issuing entities. The complaint further alleges that the defendants told investors that their money would be used to purchase or develop real estate, but instead Gane: (i) used new investor funds to pay back earlier investors; (ii) misappropriated investors' funds by using them to pay himself, his family and others; and (iii) transferred substantial portions of investor funds to Denkon, Inc., Guy W. Gane, III, and Jenna Gane for no apparent consideration. In addition, the complaint alleges that the debentures offering was not registered with the Commission and that Gane violated the broker-dealer registration provisions of the federal securities laws.

The SEC's complaint alleges that (i) all defendants 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; (ii) Gane, Altadonna, Watermark Financial, Watermark Holdings, and M-One violated Sections 5(a) and 5(c) of the Securities Act; and (iii) Gane violated Section 15(a) of the Exchange Act.

In addition to the emergency relief sought, the Commission also seeks preliminary and permanent injunctive relief and civil money penalties against the defendants as well as disgorgement by the defendants and relief defendants of their ill-gotten gains plus prejudgment interest. [SEC v. Watermark Financial Services Group, Inc., et al., Civil Action No. 08 Civ.0361 (W.D. N.Y.)] (LR-20576)


SEC Settles Civil Injunctive Action Against Nathan Rosenblatt

The Commission announced that a final judgment was entered on May 8, 2008, by the United States District Court for the Southern District of New York against Nathan Rosenblatt, a former director of NBTY, Inc., and member of its three-person audit committee. Rosenblatt consented to the entry of final judgment, without admitting or denying the allegations of the Commission's complaint, except as to jurisdiction.

The complaint, which was filed September 27, 2007, alleges that Rosenblatt tipped his close friend Morris Gad with material, nonpublic information concerning the company's significant revenue and earnings shortfall for the third quarter of 2004, prior the company's public release of its financial results. With this information in hand, Gad sold his entire position of NBTY stock, sold the stock short, purchased put contracts, and sold call contracts through the custodial accounts of his three children prior to NBTY's release of its 2004 third quarter financial results. In so doing, Gad made $399,187.40 in trading profits and losses avoided.

The Commission's complaint charged Rosenblatt and Gad with violating Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5. Gad previously settled with the Commission.

The final judgment against Rosenblatt permanently enjoins Rosenblatt from violating the antifraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act, orders him to pay a civil penalty of $399,187.40, and permanently bars him from acting as an officer or director of any public company. [SEC v. Morris Gad and Nathan Rosenblatt, 07-CV-8385 (GEL) (S.D.N.Y.)] (LR-20577)


Court Permanently Enjoins Meridian, Idaho Resident John E. Tencza and His Company American Elder Group, LLC

The Commission announced today that on May 9, 2008, Judge Elaine Bucklo of the United States District Court for the Northern District of Illinois entered an order permanently enjoining John E. Tencza, of Meridian, Idaho and formerly of Scottsdale, Arizona, and American Elder Group, L.L.C. (AEG), Tencza's business, from violating certain of the antifraud and registration provisions of the federal securities laws. The order, entered by Tencza and AEG's consent, enjoins them from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, Rules 10b-5 and 10b-10 promulgated thereunder and enjoins Tencza from aiding and abetting violations of Rule 10b-10 of the Exchange Act.

The SEC's complaint in this matter charges that Michael E. Kelly and 25 other defendants, including Tencza and AEG, participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Leases. Universal Lease investments were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC's complaint alleges that from 1999 until 2005, Kelly and others, including Tencza and AEG, raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases, including Tencza and AEG, collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico, through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges, the leasing agent was a small Panamanian travel agency controlled by Kelly, and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and the other defendants, including Tencza and AEG, failed to disclose key facts about the Universal Lease investment, including the risks of the investment and that more than $72 million in investor funds were used to pay commissions as high as 27% to the selling brokers. The SEC continues to pursue its claims against Tencza and AEG for disgorgement and civil penalties. The SEC's action against the remaining defendants is also pending.

For additional information, see Litigation Release Nos. 20267 (Sept. 5, 2007) and 20573 (May 14, 2008). [SEC v. Michael E. Kelly, et al., Case No. 1:07-CV-4979 in the United States District Court for the Northern District of Illinois] (LR-20578)


Court Permanently Enjoins San Marcos, Texas Resident Richard Riner and His Company Southwest Income Marketing, Inc.

The Commission announced today that on May 9, 2008, Judge Elaine Bucklo of the United States District Court for the Northern District of Illinois entered an order permanently enjoining Richard E. Riner, of San Marcos, Texas, and Southwest Income Marketing, Inc. (SIMI), Riner's business, from violating certain of the antifraud and registration provisions of the federal securities laws. The order, entered by Riner and SIMI's consent, enjoins them from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, Rules 10b-5 and 10b-10 promulgated thereunder and enjoins Riner from aiding and abetting violations of Rule 10b-10 of the Exchange Act.

The SEC's complaint in this matter charges that Michael E. Kelly and 25 other defendants, including Riner and SIMI, participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Leases. Universal Lease investments were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC's complaint alleges that from 1999 until 2005, Kelly and others, including Riner and SIMI, raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases, including Riner and SIMI, collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico, through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges, the leasing agent was a small Panamanian travel agency controlled by Kelly, and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and the other defendants, including Riner and SIMI, failed to disclose key facts about the Universal Lease investment, including the risks of the investment and that more than $72 million in investor funds were used to pay commissions as high as 27% to the selling brokers. The SEC continues to pursue its claims against Riner and SIMI for disgorgement and civil penalties. The SEC's action against the remaining defendants is also pending.

For additional information, see Litigation Release Nos. 20267 (Sept. 5, 2007) and 20573 (May 14, 2008). [SEC v. Michael E. Kelly, et al., Case No. 1:07-CV-4979 in the United States District Court for the Northern District of Illinois] (LR-20579)


Federal Court Orders Jamie L. Solow to Pay Over $6 Million in Disgorgement and Penalties for Violating the Antifraud Provisions and Aiding and Abetting Violations of Various Broker-Dealer Net Capital, Books and Records, and Reporting Provisions of the Federal Securities Laws

On May 14, the Honorable Donald M. Middlebrooks of the U.S. District Court for the Southern District of Florida permanently enjoined Jamie L. Solow, a former registered representative who resides in Hillsboro Beach, Florida, from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act of 1933 (Securities Act), and ordered Solow to disgorge $3,424,788.90 in ill-gotten gains (including prejudgment interest) from his violations and to pay a civil penalty in the amount of $2,646,485.99, based upon a jury verdict that had been returned against Solow in January 2008. The Court's order also enjoined Solow from aiding and abetting violations of various broker-dealer net capital, books and records, and reporting provisions and from attempting to register as a broker-dealer or investment adviser or being associated with a broker-dealer or investment adviser.

On Jan. 31, 2008, following a nine-day jury trial, the jury found that Solow had violated these antifraud provisions and had aided and abetted violations of the net capital, books and records, and reporting provisions committed by one of his former firms, Archer Alexander Securities Corp. (Archer Alexander). The Commission's complaint, filed on Nov. 8, 2006, and amended on Sept. 24, 2007, alleged that in 2003, while associated with Archer Alexander, Solow engaged in a fraudulent trading scheme involving inverse floating rate collateralized mortgage obligations (inverse floaters), a highly complex, risky, and volatile type of mortgage-backed security derivative. Solow fraudulently evaded trading restrictions imposed on him by Archer Alexander and entered into numerous non-riskless principal transactions in which he secretly bought new issues of inverse floaters worth millions of dollars from other dealers for settlement at later dates without having an offsetting sale arranged or authorization from Archer Alexander's chief executive officer. The value of the resulting proprietary positions far exceeded Archer Alexander's available net capital, thereby exposing the firm to substantial risk without its knowledge or authorization. To hide the fact that his trades were not riskless principal transactions, Solow made numerous misrepresentations and omissions, including directing his assistant to prepare and submit false trade tickets that made it appear as though he had bought and sold blocks of inverse floaters on the same day. Archer Alexander, unaware of the actual circumstances of these transactions, paid Solow millions of dollars in compensation during 2003 for inverse floater trades that he carried out pursuant to this fraudulent scheme.

The Commission's complaint also alleged that during 2003 to 2006, while associated with Archer Alexander and another registered broker-dealer, SAMCO Financial Services, Inc. (SAMCO), Solow sold inverse floaters to retail investors with conservative to moderate investment objectives or low net worth for whom these complicated, volatile, and risky securities were unsuitable investments. Solow defrauded his customers by grossly understating the risks of investing in inverse floaters. While at SAMCO, Solow recommended that his customers use high levels of margin to purchase inverse floaters, yet failed to adequately and truthfully apprise them of the increased risks associated with doing so. Eventually, as interest rates rose during the second half of 2005 and early 2006, the value of the inverse floaters that Solow had purchased for his customers, as well as the monthly interest and principal payments on these securities, declined dramatically. Many of Solow's customers, including numerous elderly or retired investors, incurred heavy or total losses when they liquidated their accounts or were unable to meet margin calls.

The Court's May 14, 2008, order stated that, "[d]uring the trial I saw Mr. Solow blame others for his failings, refuse to accept any responsibility for his own actions, and repeatedly testify falsely under oath. Based upon his demeanor and testimony at trial, and after watching his video presentation to investors and hearing the testimony of those individuals he enticed into risky investments through false promises, I conclude he should not be allowed to register as, or associate with a registered broker-dealer or investment adviser." [SEC v. Jamie L. Solow, Civil Action No. 06-81041-CIV-Middlebrooks/Johnson (S.D. Fla., Nov. 8, 2006)] (LR-20580)


SELF-REGULATORY ORGANIZATIONS

Proposed Rule Change

Stock Clearing Corporation of Philadelphia filed a proposed rule change (SR-SCCP-2008-01) under Section 19(b) of the Exchange Act to amend and restate its Articles of Incorporation. Publication is expected in the Federal Register during the week of May 12. (Rel. 34-57817)


SECURITIES ACT REGISTRATIONS


RECENT 8K FILINGS

 

http://www.sec.gov/news/digest/2008/dig051508.htm


Modified: 05/15/2008