Commission Reopens Comment Period on Proposal to Improve Mutual Fund Disclosure
On July 31, the Commission announced that it has reopened the public comment period on a proposal intended to improve mutual fund disclosure, in order to allow comments on the results of investor testing.
In November 2007, the Commission proposed rule amendments that would enable investors to view a concise, plain English summary of key facts about a mutual fund and published a prototype "summary prospectus." The proposal and the prototype "summary prospectus" are available on the Commission's Web site.
The Commission reopened the comment period for the rule proposal to provide all persons who are interested in this matter an opportunity to comment on the results of focus group testing and a telephone survey of investors. Comments on the proposal are due by Aug. 29, 2008. (Rels. 33-8949; IC-28346; File No. S7-28-07; Press Rel. 2008-163)
SEC Announces Panelists, Agenda for August 4 Roundtable on Performance of IFRS, U.S. GAAP During Subprime Crisis
Securities and Exchange Commission today announced the panelists and agenda for its August 4 roundtable concerning the performance of International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S. GAAP) during the recent period of market turmoil.
SEC Chairman Christopher Cox will begin the roundtable with opening remarks at 1 p.m. ET, followed by brief introductory comments about IFRS by John Smith, a Board Member of the International Accounting Standards Board.
The roundtable will be organized as two panels. Expected panelists include investors, issuers, auditors, and others with experience in considering or evaluating company financial statements that are prepared in accordance with IFRS or U.S. GAAP during these current times.
Panel One: Financial Reporting in the Financial Services Industry Sector
Panel Two: Financial Reporting in Other Industry Sectors
In addition, the following individuals are scheduled to participate in both panel discussions as observers:
The roundtable will take place until approximately 5 p.m. ET at the SEC's headquarters, 100 F Street N.E., Washington, D.C. The roundtable will be open to the public with seating on a first-come, first-serve basis. Doors will open at 12:30 p.m. ET. Visitors will be subject to security checks.
Real-time audio and video webcasts as well as materials related to the roundtable will be available on the SEC Web site at www.sec.gov.
For additional information, please contact John Heine in the SEC's Office of Public Affairs at 202-551-4120. (Press Rel. 2008-165)
In the Matter of Kevin Kelley
On July 31, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Kevin Kelley (Kelley). The Order finds that on May 19, 2008, the United States District Court for the Southern District of New York entered a final judgment against Kelley permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act in a matter entitled Securities and Exchange Commission v. Northshore Asset Management LLC, et al. 05 Civ. 2192.
Based on the permanent injunction, the Order bars Kelley from association with any investment adviser. Kelley consented to the issuance of the Order without admitting or denying most of the findings in the Order. (Rel. IA-2764; File No. 3-13110)
In the Matter of James B. Kinney, CMA
On July 31, the Commission issued an Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order) against James B. Kinney, CMA, who was the Vice President of Finance for the Wireless business unit of Nortel Networks Corporation. The Order finds that on May 2, 2008, a final judgment was entered against Kinney, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 (the Securities Act), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the Exchange Act), and Exchange Act Rules 10b-5 and 13b2-1, and from aiding and abetting future violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1 and 13a-13 in the civil action entitled SEC v. Frank A. Dunn, et al., Civil Action Number 07-CV-8851 (LAP), in the United States District Court for the Southern District of New York. Kinney was also ordered in that final judgment to pay $52,000 in disgorgement of ill-gotten gains, $16,481 in prejudgment interest, and a $75,000 civil money penalty.
According to the Order, the Commission finds that the Commission's complaint alleged that, from the second half of 2002 through January 2003, Kinney determined that his business unit held tens of millions of dollars in excess reserves, and that he did not release those excess reserves as required under U.S. Generally Accepted Accounting Principles (GAAP), but instead used them for earnings management purposes. The complaint also alleged that, in early January 2003, during the 2002 year-end closing process, Kinney and other finance executives improperly established additional excess reserves in order to lower Nortel's consolidated earnings and bring it in line with internal and market expectations. As alleged, his efforts, in conjunction with those of other finance executives, helped erase Nortel's pro forma profit for the fourth quarter of 2002 and caused it to report a loss instead. The complaint also alleged that, in the first and second quarters of 2003, Kinney and other finance executives improperly released hundreds of millions of dollars in excess reserves as part of a company-wide effort to inflate consolidated earnings and pay bonuses. According to the complaint, these efforts turned Nortel's first quarter 2003 loss into a reported profit under U.S. GAAP, largely erased Nortel's second quarter loss and generated a pro forma profit in the second quarter.
Based on the above, the Order suspends Kinney from appearing or practicing before the Commission as an accountant, with a right to apply for reinstatement after five years from the date of the Order. Kinney consented to the issuance of the Order without admitting or denying any of the findings of the Order. (Rel. 34-58273; AAE Rel. 2855; File No. 3-13111)
In the Matter of National Fruit and Vegetable Technology Corp.
An Administrative Law Judge has issued a Default Order in National Fruit and Vegetable Technology Corp. finding that National Record Mart Inc., National Sorbents, Inc., Nations Flooring, Inc., Netcare Health Group, Inc., and Netgain Development, Inc., all with securities registered with the Commission, failed to file required periodic reports. As a consequence, the Administrative Law Judge, acting pursuant to Section 12(j) of the Securities Exchange Act of 1934, revoked the registration of each class of securities of the five Respondents. (Rel. 34-58274; File No. 3-13080)
Jeffrey Bacsik, CPA, Reinstated to Appear and Practice before the Commission as an Accountant
Pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice, Jeffrey Bacsik, CPA, has applied for and been granted reinstatement of his privilege to appear and practice before the Commission as an accountant. Mr. Bacsik was denied the privilege of appearing or practicing before the Commission on Dec. 27, 2001. His reinstatement is effective immediately. (Rel. 34-58280; AAE Rel. 2856; File No. 3-10664)
Court Permanently Enjoins Coppell, Texas Resident Mark Meyer and His Company Mark Meyer & Associates, Inc. from Violating Certain Antifraud and Registration Provisions
The Commission announced that on July 28, Judge Elaine Bucklo of the United States District Court for the Northern District of Illinois entered an order permanently enjoining Mark G. Meyer (Meyer) of Coppell, Texas and Mark Meyer & Associates, Inc. (Meyer & Associates), Meyer's business, from violating certain of the antifraud and registration provisions of the federal securities laws. The order, entered with Meyer and Meyer & Associates' consent, permanently 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, and Rules 10b-5 and 10b-10 promulgated thereunder, and enjoins Meyer 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 Meyer and Meyer & Associates, participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Lease investments. Universal Leases 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 Meyer and Meyer & Associates, 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 Meyer and Meyer & Associates, 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 others, including Meyer and Meyer & Associates, failed to disclose key facts about the Universal Lease investments, including the risks of the investments 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 Meyer and Meyer & Associates 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), 20573 (May 14, 2008), 20578 (May 15, 2008); 20579 (May 15, 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-20664)
SEC Action Alleges Registration and Anti-Fraud Violations in Distribution of Software Company Stock
The Commission filed a civil injunctive action on July 29, alleging that six individuals, including a Houston, Texas attorney and a Las Vegas, Nevada attorney, violated the federal securities laws in their unregistered, nonexempt distribution of more than 10.8 million shares of the common stock of a Houston, Texas software development company. The complaint further alleges that from late 2005 through April 2007, the six individuals, and one relief defendant, collectively reaped proceeds exceeding $3.91 million from their illegal, over the counter sales of the common stock of the software company.
Named in the Commission's complaint for violations of the registration provisions of the Securities Act are Robert L. Sonfield, 76, a Houston attorney; Donald C. Bradley, 76, of Las Vegas; Jeffrey W. Bradley, 48, of Las Vegas; Jason Landess, 62, a Las Vegas attorney; Marc Lane, 46, believed to reside in Cadiz, Spain; and Roger Brewer, 52, believed to reside in Penzance, England. The complaint further alleges that Sonfield violated the anti-fraud provisions of the Exchange Act, and aided and abetted disclosure violations by the software company, by causing the company to fail to disclose that Sonfield and others controlled virtually all the "free trading," "public float" of the company's common stock. The complaint also names Alexanderia Blankenship, 46, of Houston, Texas, who is personally associated with Sonfield, as a relief defendant, to secure the return of stock sales proceeds transferred to her. [SEC v. Robert L. Sonfield, Donald C. Bradley, Jeffrey W. Bradley, Jason Landess, Marc Lane and Roger Brewer, Defendants, and Alexanderia K. Blankenship, Relief Defendant, Civil Action No. 4:08-cv-02351, (S.D. Texas, Houston Division] (LR-20665)
SEC v. Paul G. Merklinger, et al.
On July 31, the Honorable Gerald E. Rosen of the United States District Court for the Eastern District of Michigan issued an order of preliminary injunction and asset freeze against Paul G. Merklinger (Merklinger) of Novi, Michigan, and Encore Associated Leasing, LLC (Encore Leasing), a company formed, owned and controlled by Merklinger, and issued an asset freeze against Merklinger's son, Brian Merklinger, a relief defendant. Previously, on July 24, 2008, Judge Rosen issued an order temporarily prohibiting Merklinger and Encore Leasing from attempting to offer securities or other investments and from transferring any assets. That order was issued under seal by the court and that seal has now been lifted.
According to the SEC's complaint, from September 2006 to July 2007, Merklinger raised at least $7.2 million from five investors through the sale of investments in his purported tire recycling business. The investments consisted of an interest in a tire shredding truck that Encore Leasing would lease from the investor and purportedly use in its business operations, and a $10,000 warrant for a 1% interest in Encore Leasing. Merklinger told investors that a working prototype of the shredding truck existed and that their trucks would be in operation shortly. He promised that Encore Leasing would pay the investors $15,000 in monthly leasing fees and investment interest, and that after five years, the investors could expect returns of up to 372% and the warrant would be worth at least $1.2 million. However, as alleged in the SEC's complaint, there was no working prototype, no reasonable basis for Merklinger's income and return figures, and the investors never received a dime from their investment. Instead, Merklinger used more than $950,000 of investor funds for his own personal benefit, including payments for rent, back taxes and the purchase of luxury automobiles and watercraft and extravagant landscaping and furnishings for his home. He also, as alleged in the SEC's complaint, spent or transferred more than $172,000 for the benefit of his son, Brian Merklinger, and used more than $134,000 to make payments to investors in one of his other companies. Further, Merklinger failed to disclose to investors that he had been barred from participating in Ontario, Canada's securities markets for ten years in connection with a prior investment scheme.
The SEC's complaint charges Merklinger and Encore Leasing with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks permanent injunctive relief, disgorgement, and civil penalties. The SEC further seeks disgorgement of all investor funds or assets acquired with investor funds from Relief Defendant Brian Merklinger. [SEC v. Paul G. Merklinger, et al, Case No. 08 CV 13184, United States District Court for the Eastern District of Michigan] (LR-20666)
SEC v. Jason R. Hyatt, Jay D. Johnson, and Hyatt Johnson Capital, LLC
The Commission announced that on July 25, the Honorable George W. Lindberg of the United States District Court for the Northern District of Illinois entered an Agreed Order Making Findings of Contempt of the Court's April 18, 2008 Asset Freeze Order by Jason R. Hyatt and Heidi E. Hyatt (the Contempt Order). The Contempt Order found that Jason Hyatt and his wife Heidi Hyatt were in contempt of an order that the Honorable William J. Hibbler, acting as emergency judge, entered on April 18, 2008 freezing all of the assets of Jason Hyatt (the Asset Freeze Order).
The Asset Freeze Order had been entered as part of the emergency remedies the Commission sought and obtained when it filed a civil injunctive complaint on April 18, 2008, alleging that from approximately 2003 through 2007, Defendants Hyatt, Johnson, and Hyatt Johnson Capital, LLC, while acting as unregistered broker-dealers and investment advisers, misappropriated at least $5.4 million in investor funds. The Complaint alleged that, as a result of their conduct, the Defendants violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
On April 19, 2008, the Commission filed a Motion to Show Cause (Contempt Motion) against Jason Hyatt and Heidi Hyatt. The Commission's Contempt Motion alleged that, after Jason Hyatt received notice of the Asset Freeze Order, Heidi Hyatt withdrew at least $57,000 in cash from Jason Hyatt's bank account in three separate visits to two different branches of a bank over an approximately one-hour period. In connection with the Contempt Motion the Commission stated in a pre-hearing status report that, shortly after Jason Hyatt learned of the Asset Freeze Order, thirteen telephone calls took place between him and Heidi Hyatt. While the Contempt Motion was pending, the Court ordered Jason Hyatt to return substantially all of the cash to his bank account.
The Commission also announced that on June 12, 2008, the Special June 2007 Grand Jury for the Northern District of Illinois returned an eleven-count indictment for Jason Hyatt. U.S. v. Jason R. Hyatt, Criminal Action No. 1:08-cr-0469 (N.D. Ill.) (Kocoras, J.). This indictment included various counts of wire fraud (18 USC 1343), bank fraud (18 USC 1014), engaging in monetary transactions in property derived from specified unlawful activity (18 USC 1957(a)), filing a false income tax return (26 USC 7206(1)), willful failure to file a tax return (26 USC 7203), and tax evasion (26 USC 7201). [SEC v. Jason R. Hyatt, Jay Johnson and Hyatt Johnson Capital, LLC, Civil Action No. 1:08-CV-2224 (N.D. Ill.)(Lindberg, J.)] (LR-20667)
SEC Charges Former CEO and Former Director and Interim CFO of SeraCare Life Sciences with Financial Fraud
On July 31, the Commission filed securities fraud charges against Michael F. Crowley, Jr., the former chief executive officer of SeraCare Life Sciences, Inc., and Jerry L. Burdick, a former member of SeraCare's board of directors and the former interim chief financial officer, for their roles in financial fraud at SeraCare during 2005.
The SEC's complaint against Crowley, filed in federal district court in San Diego, alleges that Crowley, age 40, of San Diego, failed to disclose material information in SeraCare's Form 10-Q and earnings release for the first quarter of its fiscal year 2005 and during an earnings call with investors. Specifically, the complaint alleges that Crowley learned the day before these disclosures were made that a bill and hold sale representing almost 11% of SeraCare's quarterly net income before taxes had been cancelled by a major customer. In spite of this knowledge, Crowley failed to disclose the cancelled sale in any of SeraCare's first quarter disclosures, including the quarterly report that Crowley signed and certified, an earnings release, and an investor conference call.
The SEC also filed a separate complaint against Burdick, age 68, of Westlake Village, Calif., alleging that in SeraCare's second and third quarters of 2005, Burdick improperly released general inventory reserves that he had created following a major acquisition by SeraCare in 2004. As a result, SeraCare's net income before taxes was artificially inflated in the second and third quarters by 20% and 17%, respectively, and misstated in the corresponding quarterly reports filed by SeraCare that Burdick prepared and/or certified. The complaint further alleges that Burdick also caused misrepresentations to SeraCare's outside auditors by creating a backdated letter that was given to the auditors in order to recognize revenue on an almost $1 million sale before the close of the 2005 fiscal year. Finally, the Commission's complaint alleges that Burdick misled SeraCare's auditors by providing them an increased inventory valuation without any documented or verifiable support.
Crowley and Burdick each agreed to settle the SEC's charges without admitting or denying the allegations in the complaint. Crowley agreed to pay a civil penalty of $25,000 and will be permanently enjoined from violations of Section 17(a)(2) and (3) of the Securities Act of 1933 (Securities Act) and Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act), and aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder. Burdick agreed to pay a civil penalty of $25,000 and also agreed to be permanently enjoined from violations of Section 17(a)(2) and (3) of the Securities Act and Rules 13a-14, 13b2-1, and 13b2-2 of the Exchange Act, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. Burdick, a certified public accountant, also agreed to a one year suspension from appearing or practicing before the Commission as an accountant under Rule 102(e) of the Commission's Rules of Practice. [SEC v. Michael F. Crowley, Jr., United States District Court for the Southern District of California, Civil Action No. 08-CV-1388 J (RBB); SEC v. v. Jerry L. Burdick, United States District Court for the Southern District of California, Civil Action No. 08-CV-1390 JAH (JMA)] (LR-20668; AAE Rel. 2857)
INVESTMENT COMPANY ACT RELEASES
Goldman Sachs Trust, et al.
A notice has been issued giving interested persons until August 25 to request a hearing on an application filed by Goldman Sachs Trust, et al., under Section 12(d)(1)(J) of the Investment Company Act for an exemption from Sections 12(d)(1)(A) and (B) of the Act, and under Sections 6(c) and 17(b) of the Act for an exemption from Section 17(a) of the Act. The order would permit certain registered open-end management investment companies to acquire shares of other registered open-end management investment companies and unit investment trusts that are within and outside the same group of investment companies. (Rel. IC-28347 - July 31)
Proposed Rule Changes
The Depository Trust Company filed a proposed rule change (SR-DTC-2008-05) under Section 19(b)(1) of the Securities Exchange Act of 1934. The proposed rule change would establish a new disincentive fee relating to DTC's Money Market Instrument procedures. Publication is expected in the Federal Register during the week of August 4. (Rel. 34-58252)
The New York Stock Exchange filed a proposed rule change (SR-NYSE-2008-58) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to make permanent a pilot program under which the Exchange excludes from its earnings standard gains or losses from extinguishment of debt prior to maturity. Publication is expected in the Federal Register during the week of August 4. (Rel. 34-58254)
The American Stock Exchange filed a proposed rule change (SR-Amex-2008-63), pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, relating to the relocation of equities trading after the acquisition of the Exchange by NYSE Euronext. Publication is expected in the Federal Register during the week of August 4. (Rel. 34-58265)
Accelerated Approval of Proposed Rule Change
The Options Clearing Corporation filed a proposed rule change (SR-OCC-2008-12) under Section 19(b)(1) of the Securities Exchange Act of 1934. The proposed rule change, which the Commission approved on an accelerated basis, will amend OCC Rule 705 to add shares of money market funds as a form of collateral that may be deposited and recognized with respect to cross-margin accounts. In addition, the proposed rule change revises the cross-margining agreement between OCC and the Chicago Mercantile Exchange, Inc., to reflect the allowance of money market fund shares as acceptable collateral. Publication is expected in the Federal Register during the week of August 4. (Rel. 34-58258)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change (SR-NYSE-2008-66) filed by the New York Stock Exchange to make permanent the portfolio margin pilot program 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 August 4. (Rel. 34-58261)
A proposed rule change (SR-CBOE-2008-74) filed by the Chicago Board Options Exchange to make amendments to the portfolio margining rules 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 August 4. (Rel. 34-58262)
A proposed rule change (SR-FINRA-2008-042) filed by the Financial Industry Regulatory Authority relating to amendments to portfolio margin 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 August 4. (Rel. 34-58263)
A proposed rule change filed by the International Securities Exchange to amend Rule 2009 to permit the listing and trading of additional index options series that do not meet current Rule 2009 requirements, if such options series are listed and traded on at least one other national securities exchange (SR-ISE-2008-59) 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 August 4. (Rel. 34-58267)
A proposed rule change (SR-NYSE-2008-65) filed by the New York Stock Exchange to make amendments to the portfolio margining rules 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 August 4. (Rel. 34-58269)
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