RULES AND RELATED MATTERS
Proposed Rules relating to Nationally Recognized Statistical Rating Organizations and Credit Ratings
The Commission proposed rule amendments and a new rule that would impose additional requirements on nationally recognized statistical rating organizations in order to address concerns raised about the policies and procedures for, transparency of, and potential conflicts of interest relating to ratings of residential mortgage-backed securities backed by subprime mortgage loans and collateralized debt obligations linked to subprime loans. (Rel. 34-57967; File No. S7-13-08)
Commission Revokes the Registration of the Securities of NEC Corporation for Failure to Make Required Filings
On June 17, the Commission instituted settled proceedings against NEC Corporation (NEC) (i) pursuant to Section 12(j) of the Securities Exchange Act of 1934 (Exchange Act), revoking the registration of each class of NEC's registered securities based on NEC's failure to file annual reports with the Commission for fiscal years 2006 and 2007, and (ii) pursuant to Section 21C of the Exchange Act, ordering NEC to cease and desist from committing certain violations based on NEC's failure to file annual reports, and maintain sufficient internal accounting controls, and accurate books and records.
The Commission found that, for fiscal years 2000 through 2005, NEC filed annual reports with the Commission that misstated revenues, net income, or net loss. Specifically, NEC improperly recognized revenues from contracts with customers that included the provision of hardware, software, and customer support. From 2000 through 2006, NEC also did not maintain accurate books and records, and had deficient internal accounting controls. As a result of these deficiencies, NEC is unable to restate prior financial statements and to file with the Commission annual reports for fiscal years ended March 31, 2006 and March 31, 2007.
NEC, without admitting or denying the findings in the Commission's order, consented to the entry of the order (i) revoking the registration of each class of NEC's securities pursuant to Exchange Act Section 12(j), and (ii) that NEC cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rule 13a-1.
Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:
No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .
(Rel. 34-57974; AAE Rel. 2839; File No. 3-13071)
In the Matter of Preston D. Hopper, CPA
On June 17, the Commission issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease-and-Desist Order (Order) against Preston D. Hopper, CPA. The Order finds that Hopper, as Chief Accounting Officer of CMS Energy Corp. (CMS), allowed the company to include revenues and expenses associated with round trip energy transactions in financial statements filed with the Commission. The inclusion of those transactions caused CMS's financial statements to present a materially misleading picture of CMS's actual business activity. Additionally, after CMS's auditors determined that the round trip trades should be recorded on a net basis in October 2001, Hopper did not ensure that CMS' quarterly report, which was filed with the Commission, omitted the transactions. Finally, Hopper had responsibility for properly disclosing the nature and extent of CMS's restatement of earnings to exclude the round trip trades in the explanation included in its March 29, 2002 Form 10-K, which failed adequately to disclose the facts and circumstances of the round trip trades. Hopper's conduct with respect to the round trip trades was negligent and, as such, he was a cause of CMS' filing of reports, including offering materials, which included revenues and expenses related to the round trip trades. Additionally, Hopper was also a cause of CMS's misstatement of the company's transactions in its books, records, and accounts.
Based on the above, the Order directs Preston D. Hopper to cease and desist from committing or causing any violation and any future violation of Sections 17(a)(2) and (3) of the Securities Act, and cease and desist from causing any violation or future violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Preston D. Hopper consented to the issuance of the Order without admitting or denying any of the findings contained in the Order. (Rels. 33-8930; 34-57978; AAE Rel. 2840; File No. 3-13072)
In the Matter of Tamela Pallas
On June 17, the Commission issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease-and-Desist Order (Order) against Tamela Pallas. The Order finds that Pallas participated in and approved of the decision to do round trip energy trades while she was (a) Senior Vice President of Reliant Energy Services, Inc., a subsidiary of Reliant Energy, Inc. (Reliant), that was a part of Reliant's Wholesale Group and as the Chief Operating Officer and later (b) Chief Executive Officer of CMS Marketing Services & Trading, a subsidiary of CMS Energy Corp. (CMS). The inclusion of those transactions caused Reliant's and CMS's financial statements to present materially misleading pictures of their actual business activity. Although Pallas neither participated in discussions or decisions regarding how to account for the transactions nor participated in drafting earnings releases or Commission filings at either Reliant or CMS, Pallas should have known that the revenues and expenses associated with the round trip trades would be included in each company's financial statements, including filings made with the Commission. The Order finds that Pallas's conduct with respect to the round trip trades was negligent and, as such, was a cause of the filing of reports, including offering materials, which included revenues and expenses related to round trip trades. Respondent's negligent conduct was also therefore a cause of the related misstatement of the transactions in each company's books, records and accounts.
Based on the above, the Order directs Tamela Pallas to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) and (3) of the Securities Act, and cease and desist from causing any violation or future violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Tamela Pallas consented to the issuance of the Order without admitting or denying any of the findings contained in the Order. (Rels. 33-8931; 34-57979; AAE Rel. 2841; File No. 3-13073)
Stephen L. Hochberg Pleads Guilty to Defrauding Investors
On June 13, Stephen L. Hochberg, an accountant turned business consultant and unregistered investment adviser, pled guilty to eight counts of wire fraud and nine counts of fraud in connection with the purchase or sale of a security in a plea agreement with the U.S. Attorney's Office in Boston, Massachusetts. On May 21, 2008, Hochberg was charged in a 17-count criminal information that alleged, among other things, that from in or about September 2002 and continuing through in or about August 2007, Hochberg obtained at least $1,541,500 from six investors for a purported real estate investment fund, Realty Funding LLC, that did not exist. The information also alleges that, in or about June 2003 and April 2004, Hochberg obtained a total of $150,000 from an elderly investor for a purported investment in a tax free investment fund. According to the information, in both schemes, Hochberg never invested any funds as he described and instead used the funds for his own personal expenses and business debts.
On May 21, the Commission filed a civil injunctive complaint in the U.S. District Court in Massachusetts alleging that Hochberg's conduct violated the antifraud provisions of the federal securities laws. The Commission is seeking a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, civil penalties, and an order barring Hochberg from serving as an officer or director of a public company. The Commission's allegations arose from the same underlying conduct described in the criminal information. The Commission's action against Hochberg is still pending. [SEC v. Stephen L. Hochberg, Civil Action No. 08-10848, USDC, D. Mass., Woodlock, J.] (LR-20619)
Judgment of Permanent Injunction and Other Relief Entered Against Richard Brace
The Commission announced that on April 23, 2008, the United States District Court for the Middle District of Florida entered a Judgment of Permanent Injunction and Other Relief by consent against Defendant Richard Brace. The Judgment enjoins Brace from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Judgment also permanently bars Brace from participating in an offering of penny stock or acting as an officer and director of any public company registered with the Commission.
The Commission commenced this action by filing its complaint on Feb. 22, 2008, against GMC Holding Corporation and Brace, its chief executive officer, for allegedly defrauding investors by issuing false press releases touting the company's development of a motor technology device capable of generating unlimited energy and negotiations to sell this technology for hundreds of millions of dollars. The Commission's complaint further alleges that these false press releases enabled GMC and Brace to raise more than $2 million from investors through illegal unregistered offerings of the company's stock. [SEC v. GMC Holding Corporation and Richard Brace, Case No. 6:08-CV-00275-GKS-KRS (M. D. Fla.)] (LR-20620)
SEC Obtains Freeze Order and Other Emergency Relief Against Houston Company With Sales of Fraudulent Securities to Mostly Elderly Investors
On June 5, 2008, the Commission obtained an order freezing assets and granting other emergency relief in a pending action in Dallas federal court involving what the Commission contends is a fraudulent offering of securities, known as Secured Debt Obligations (SDOs), by W Financial Group, LLC. (W Financial). The district court entered orders freezing the defendants' assets, requiring an accounting and repatriation of assets, and ordered defendants to preserve documents and submit to expedited discovery. The Court scheduled a preliminary injunction hearing to take place on June 25, 2008, at which time the Court will also consider the Commission's request to appoint a receiver to marshal and conserve assets for the benefit of defrauded investors.
The Commission's complaint, filed on March 21, 2008, alleges that the defendants, directly and through sales agents, raised at least $17.9 million from at least 182 investors between September 2006 and February 2007. According to the Commission complaint, W Financial investors, primary senior citizens and retirees, were lured into purchasing SDOs through a series of misrepresentations and omissions that portray SDOs to be as safe as FDIC-backed certificates of deposit. The complaint further alleges that the defendants misappropriated and misused the majority of W Financial investor funds, spending millions of dollars, for example, to purchase and operate high-risk business enterprises such as a retail electric power provider and a custom home-building company.
The defendants are charged with securities fraud under both the Securities Act of 1933 and the Securities Exchange Act of 1934 and with conducting an unregistered offering under the Securities Act. In addition to the relief granted by the court, the complaint seeks civil penalties and disgorgement of ill-gotten gains against each defendant.
On March 21, 2008, simultaneously with the filing of the complaint, the Commission, with the consent of defendants, asked the Court to appoint a Special Master to oversee the liquidation by defendants of certain assets and to take custody of the proceeds from these sales. Subsequently, the Court appointed Vernon T. Jones, Jr. as Special Master.
The Commission contends that the defendants failed to comply with the order appointing the Special Master and concealed material information from the Commission, the Special Master and their own counsel. Based on this conduct and on the egregiousness of the defendants' fraud against investors, the Commission maintains that the Court should grant more stringent remedies to preserve funds and assets to provide investors with monetary relief. [SEC v. W Financial Group, LLC, Adley H. Abdulwahab, Michael K. Wallens, Sr. and Michael K. Wallens, Jr., Civil Action No. 3:08-CV-0499-N (U.S.D.C., Northern District of Texas, Dallas Division)] (LR-20621)
Proposed Rule Changes
NYSE Arca filed a proposed rule change as modified by Amendment No. 1 thereto (SR-NYSEArca-2008-56) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to amend the pilot program for initial and continued listing standard, to provide that currently traded issuers will be required to meet each of the $5 closing price requirement and the $150 million market value of listed securities requirement on the basis of a 90 trading day average of the closing price of the company's common stock prior to applying for listing. Publication is expected in the Federal Register during the week of June 16. (Rel. 34-57958)
The Depository Trust Company filed a proposed rule change (SR-DTC-2006-16) pursuant to Section 19(b)(1) of the Act that will update, standardize, and restate the requirements for the Fast Automated Securities Transfer Program (FAST), will delineate the responsibilities of DTC and the transfer agents with respect to the securities held by transfer agents as part of the FAST program, and will restate the requirements for transfer agents participating in the Direct Registration System. Publication is expected in the Federal Register during the week of June 16. (Rel. 34-57959)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change, as modified by Amendment No. 1 thereto (SR-NASDAQ-2008-039), submitted pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 by The NASDAQ Stock Market relating to the listing and trading of Managed Fund Shares. Publication is expected in the Federal Register during the week of June 16. (Rel. 34-57962)
The Commission approved a proposed rule change (SR-NASD-2006-005) filed by the National Association of Securities Dealers to expand the scope of NASD Rule 2440 and Interpretive Material 2440-1 relating to fair prices and commissions to apply to all securities transactions. Publication is expected in the Federal Register during the week of June 16. (Rel. 34-57964)
Accelerated Approval of Proposed Rule Changes
The Commission published notice of filing of Amendment No. 2 and granted accelerated approval to a proposed rule change (SR-NASDAQ-2006-060), as modified by Amendment Nos. 1 and 2 thereto, submitted by The NASDAQ Stock Market pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to establish Nasdaq Last Sale Data Feeds. Publication is expected in the Federal Register during the week of June 16. (Rel. 34-57965)
The Commission published notice of filing of Amendment Nos. 1 and 2 and granted accelerated approval to a proposed rule change (SR-NYSE-2007-04), as modified by Amendment Nos. 1 and 2 thereto, submitted by the New York Stock Exchange pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 relating to approval of fee for NYSE Real-Time Reference Prices. Publication is expected in the Federal Register during the week of June 16. (Rel. 34-57966)
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