Securities and Exchange Commission Suspends Trading in Three Issuers for Failure to Make Required Periodic Filings
The U.S. Securities and Exchange Commission announced the temporary suspension of trading in the securities of the following issuers, commencing at 9:30 a.m. EDT on Sept. 17, 2008, and terminating at 11:59 p.m. EDT on Sept. 30, 2008.
The Commission temporarily suspended trading in the securities of these three issuers due to a lack of current and accurate information about the companies because they have not filed periodic reports with the Commission in over two years. This order was entered pursuant to Section 12(k) of the Securities Exchange Act of 1934 (Exchange Act).
The Commission cautions brokers, dealers, shareholders and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by these companies.
Brokers and dealers should be alert to the fact that, pursuant to Exchange Act Rule 15c2-11, at the termination of the trading suspensions, no quotation may be entered relating to the securities of the subject companies unless and until the broker or dealer has strictly complied with all of the provisions of the rule. If any broker or dealer is uncertain as to what is required by the rule, it should refrain from entering quotations relating to the securities of these companies that have been subject to a trading suspension until such time as it has familiarized itself with the rule and is certain that all of its provisions have been met. Any broker or dealer with questions regarding the rule should contact the staff of the Securities and Exchange Commission in Washington, DC at (202) 551-5720. If any broker or dealer enters any quotation which is in violation of the rule, the Commission will consider the need for prompt enforcement action.
If any broker, dealer or other person has any information which may relate to this matter, they should immediately communicate it to the Delinquent Filings Branch of the Division of Enforcement at (202) 551-5466, or by e-mail at DelinquentFilings@sec.gov. (Rel. 34-58557)
SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses
The Securities and Exchange Commission today took several coordinated actions to strengthen investor protections against "naked" short selling. The Commission's actions will apply to the securities of all public companies, including all companies in the financial sector. The actions are effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.
"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling," said SEC Chairman Christopher Cox. "The Enforcement Division, the Office of Compliance Inspections and Examinations, and the Division of Trading and Markets will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation."
In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.
Today's Commission actions, which are the result of rulemaking under the Administrative Procedure Act, go beyond its previously issued emergency order, which was limited to the securities of financial firms with access to the Federal Reserve's Primary Dealer Credit Facility. Because the agency's exercise of its emergency authority is limited to 30 days, the previous order under Section 12(k)(2) of the Securities Exchange Act of 1934 expired on Aug. 12, 2008.
The Commission's actions were as follows:
Hard T+3 Close-Out Requirement; Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-Borrow
The Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.
If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller's behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer's activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.
Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.
Exception for Options Market Makers from Short Selling Close-Out Provisions in Reg SHO Repealed
The Commission approved a final rule to eliminate the options market maker exception from the close-out requirement of Rule 203(b)(3) in Regulation SHO. This rule change also becomes effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.
As a result, options market makers will be treated in the same way as all other market participants, and required to abide by the hard T+3 closeout requirements that effectively ban naked short selling.
Rule 10b-21 Short Selling Anti-Fraud Rule
The Commission adopted Rule 10b-21, which expressly targets fraudulent short selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This rule also becomes effective at 12:01 a.m. ET on Thursday. (Press Rel. 2008-204)
SEC Issues Clarification on Accounting Issues Relating to Bank Support for Money Market Mutual Funds
The Securities and Exchange Commission's Office of the Chief Accountant clarified that bank support of money market mutual funds generally does not result in a requirement to present the fund on-balance sheet. As a result of recent market events, it is possible that some money market funds could become exposed to declines in the credit worthiness of troubled assets. To protect investors' principal investment in these funds, sponsoring financial institutions can provide various types of financial support.
The Office of the Chief Accountant has received questions related to whether the actions by these sponsoring financial institutions may result in on-balance sheet accounting for supported money market funds. The Office of the Chief Accountant believes that on-balance sheet accounting for supported money market funds is not required if the sponsoring financial institution does not absorb the majority of the expected future risk associated with the money market fund's assets, including interest rate, liquidity, credit and other relevant risks that are expected to impact the value of the money market fund assets. However, SEC staff would expect adequate disclosure of the nature of the support provided.
In an unusual situation where the nature of the support results in exposing the sponsoring financial institution to a majority of the expected future risk, the Office of the Chief Accountant would encourage consultation on issues associated with presenting money market mutual funds in the financial statements, including consideration of acceptable presentation and disclosure models.
For more information, please contact James Kroeker, Deputy Chief Accountant, at 202-551-5360, or Robert Malhotra, Professional Accounting Fellow, at 202-551-5305. (Press Rel. 2008-205)
Statement on Proposed Lehman Brothers, Inc. Acquisition by Barclays
Since the decision by Lehman Brothers Holdings, Inc. to file for bankruptcy protection on Sunday, Sept. 14, 2008, the Securities and Exchange Commission has moved swiftly to protect investors' securities and cash. Since Sunday, the SEC has worked closely with lawyers and representatives of Lehman, Barclays, and other interested parties, as well as other U.S. and international regulators, including the U.K. Financial Services Authority, to arrange for the orderly transfer of customer accounts. The announcement that Barclays Capital plans to acquire the business and assets of Lehman Brothers, Inc., the U.S. brokerage arm of the consolidated holding company will, if approved by the U.S. bankruptcy court, provide for the resolution of all of Lehman Brothers, Inc.'s U.S. operations.
SEC Chairman Christopher Cox said, "This is welcome news for every one of Lehman's customers. If approved by the court, customers will be able to look forward to an immediate transition of their accounts. Even before the transaction is completed, they will benefit because the broker-dealer and 10,000 Lehman employees will be able to continue their work with clarity about their future, and with greater funding resources for the broker-dealer's operations."
The SEC is leading the U.S. government's efforts to assure the prompt and orderly transfer of Lehman's customer accounts to another broker-dealer with as little disruption as possible to customers. Together with the Federal Reserve Bank of New York, bankruptcy counsel, SIPC, and FINRA, as well as other regulators and interested parties, the SEC has been working to address the issues generated by the filing for protection under Chapter 11 by the broker-dealer's parent company. SEC staff from the agency's Washington D.C. and New York City offices remain on-site at Lehman headquarters in New York and at the Federal Reserve Bank of New York.
Under the terms of the transaction as proposed, in addition to Barclays acquiring the U.S. business and operating assets of Lehman Brothers, Inc., the transaction includes the Lehman Brothers headquarters building in New York City. The transaction is subject to approval by the bankruptcy court. (Press Rel. 2008-206)
SEC Seniors Summit to Help Securities Firms and Professionals Better Serve Older Investors
The Securities and Exchange Commission today announced the final agenda for the afternoon session of its Seniors Summit for financial services professionals who want to learn firsthand how to effectively deal with new emerging issues involved with managing the finances and investments of senior citizens.
The SEC's Seniors Summit will take place at its Washington D.C. headquarters on Monday, September 22.
Employees of financial services firms are encouraged to attend this free event. Advance registration is required. The afternoon session, from 1:15 p.m. to 5:15 p.m. ET, is called: "What Financial Services Firms and Industry Professionals Need to Know About Serving the Senior Investor." Speakers include SEC Chairman Christopher Cox, FINRA Chief Executive Officer Mary Schapiro, NASAA President Fred Joseph, AARP Chief Operating Officer Thomas Nelson, experts on aging issues, representatives of industry groups, and other federal, state and FINRA officials.
"The largest demographic wave in U.S. history is approaching - Americans are living far longer than ever before and more than 76 million baby boomers are set to reach retirement age in coming years," said Lori Richards, Director of the SEC Office of Compliance Inspections and Examinations. "This presents a challenge to securities firms and securities professionals - they must develop ways to ensure that they are prepared to serve this vastly expanded customer base of older investors and effectively serving their interests with respect to their retirement assets and savings. The Seniors Summit will help them do that."
The Seniors Summit's afternoon session will focus on how securities firms and professionals can effectively serve older investors, and the challenges that come with that responsibility.
Attendees can expect to learn:
Financial services professionals can register to attend the SEC's Seniors Summit by sending an e-mail to SeniorSummitAfternoon@pcicom.com or calling 1-800-732-0330.
Seniors Summit Agenda
Afternoon Session for Financial Services Firms: "What Financial Services Firms and Industry Professionals Need to Know About Serving the Senior Investor"
Opening Remarks: SEC Chairman Christopher Cox, FINRA Chief Executive Officer Mary Schapiro, NASAA President Fred Joseph, AARP Chief Operating Officer Thomas Nelson
1:45-2:45 p.m. "Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors"
2:45-3:45 p.m. "Diminished Capacity: What Every Financial Services Professional Should Know"
4-5 p.m. "Enforcement Trends Involving Seniors"
5-5:15 p.m. Closing Remarks: Lori Richards, Director of SEC's Office of Compliance Inspections and Examinations
(Press Rel. 2008-207)
Closed Meeting - Wednesday, September 17, 2008, - 2:00 p.m.
The subject matter of the closed meeting held on Wednesday, Sept. 17, 2008, was: matters related to the financial markets.
Closed Meeting -Tuesday, September 23, 2008 - 10:00 a.m.
The subject matter of the closed meeting scheduled for Tuesday, Sept. 23, 2008, will be: formal orders of investigation; institution and settlement of injunctive actions; institution and settlement of administrative proceedings of an enforcement nature; and other matters relating to enforcement proceedings.
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.
Securities And Exchange Commission Orders Hearing on Registration Revocation Against Nine Public Companies for Failure to Make Required Periodic Filings
On September 16, the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registrations of each class of the securities of nine companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the nine issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-58556; File No. 3-13202)
Commission Orders Hearings on Registration Suspension or Revocation Against Three Companies for Failure to Make Required Periodic Filings
In conjunction with today's trading suspension, the Commission today also instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registration of each class of the securities of three companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the three issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of the securities of these respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-58558; File No. 3-13203)
In the Matter of Douglas B. Peterson, Respondent
On September 17, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Order) against Douglas B. Peterson. Peterson consented to the issuance of the Order without admitting or denying any of the findings therein.
The Order finds that Douglas B. Peterson, 43, of Casper, Wyoming, was a sales manager for Colorado Springs-based American Energy Resources Corporation (American Energy Resources) from August 2005 through January 2007. In this role, Peterson offered and sold, and trained others to offer and sell, undivided fractional interests in oil and gas wells through cold call telephone solicitations of prospective investors, seminars advertised in local newspapers, and mailings of American Energy Resources offering materials. Peterson received transaction-based compensation in connection with his sales of American Energy Resources securities and sales of securities by salespeople under his management.
During the relevant period, Peterson was not associated with a registered broker or dealer. No registration statement was filed with the Commission or was in effect as to the transactions in securities issued by American Energy Resources. Moreover, the securities issued by American Energy Resources were not exempt from registration.
Based on the above, the Order finds that Peterson willfully violated Sections 5(a) and 5(c) of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934 and orders Peterson to cease and desist from committing or causing any violations and any future violations of those provisions. The Order further bars Peterson from association with any broker or dealer, with the right to reapply for association after one year. The Order also orders Peterson to pay disgorgement of $396,853.86 plus prejudgment interest of $47,841.75, but waives payment of these amounts and does not impose a civil penalty based on Peterson's Sworn Statement of Financial Condition and other documents submitted to the Commission. (Rel. 34-58559; File No. 3-13204)
In the Matter of Pacific Coast Apparel Co., Inc.
An Administrative Law Judge has found Pacific Coast Apparel Co., Inc., Pacific Gateway Exchange, Inc., Pacific International Services Corp., Pallet Management Systems, Inc., Palm Desert Art, Inc., Panaco, Inc., and Patriot Motorcycle Corp. in default, in the Matter of Pacific Coast Apparel Co., Inc., er al., and revoked the registrations of each class of their securities based on findings that they violated Section 13(a) of the Securities Exchange Act of 1934 and Exchange Act Rules 13a-1 and 13a-13 by failing to file required periodic reports with the Securities and Exchange Commission. (Rel. 34-58560; File No. 3-13135)
In the Matter of National Capital Companies, Inc.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default (Default Order) in the Matter of National Capital Companies, Inc. The Order Instituting Proceedings alleged that The National Capital Companies, Inc., National Environmental Controls, Inc., National Real Estate Limited Partnership Income Properties, National Real Estate Limited Partnership Income Properties II, Navarone, Inc., NBG Radio Network, Inc., and Net-Matrix Limited each failed repeatedly to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission.
The Default Order finds these allegations to be true and revokes the registrations of each class of registered securities of all seven Respondents pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-58561; File No. 3-13100)
SEC v. James D. Zeglis, Gautum Gupta, Lance D. McKee and Jim W. Dixon
The Commission announced today that it filed a complaint in the United States District Court for the Northern District of Illinois against James D. Zeglis (Zeglis) and Gautum Gupta (Gupta), Lance D. McKee (McKee) and Jim W. Dixon (Dixon) alleging fraud in connection with insider trading in the securities of Georgia-Pacific Corporation by three individuals who received tips directly or indirectly from defendant Zeglis. The complaint alleges that Zeglis misappropriated material nonpublic information from his brother, a member of Georgia-Pacific's board of directors, and further alleges that on Nov. 10, 2005, three days before a public announcement that Georgia-Pacific had agreed to be acquired by Koch Industries, Inc., Zeglis tipped Gupta and Dixon, both of whom purchased Georgia-Pacific securities. Gupta, in turn, tipped McKee, who also purchased Georgia-Pacific securities.
Further, the complaint alleges that after Zeglis tipped Dixon, Dixon purchased Georgia-Pacific options on Zeglis's recommendation, and paid Zeglis a kickback from his ill-gotten gains. Within moments after meeting with Zeglis, Gupta transferred $400,000 from a commodities brokerage account to his bank account and placed a 40 second phone call to McKee. After the phone call from Gupta, McKee almost immediately purchased 500 shares of Georgia-Pacific stock, a stock he had never previously purchased. Within a few hours, Gupta had opened a brokerage account, transferred the $400,000 into his new brokerage account, and made his first stock purchase in ten years by purchasing 20,000 shares of Georgia-Pacific. The following day, Gupta purchased an additional 10,000 shares and then purchased 241short term call options in Georgia-Pacific, increasing his investment in Georgia-Pacific securities to more than $1 million. Further, the complaint alleges that on Sunday, Nov. 13, 2005, Koch Industries, Inc. (Koch) publicly announced a definitive agreement for a Koch subsidiary to make a cash tender offer for all shares of Georgia-Pacific. The following day, Georgia-Pacific's stock price increased 36% in response to the announcement. Gupta and McKee then sold their Georgia-Pacific securities, realizing profits of $689,401 and $7,157.60, respectively. Dixon also realized a profit of $116,000 from the sale of Georgia-Pacific options. Thereafter, over the course of several months, Dixon paid Zeglis approximately $25,000 of his profits.
The complaint further alleges that the defendants violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The Commission seeks: (i) permanent injunctions against future violations; (ii) disgorgement of ill gotten gains with prejudgment interest thereon and (iii) imposition of civil penalties against the defendants. With its complaint, the Commission also filed stipulated consents to final judgments by defendants McKee and Dixon. McKee and Dixon have stipulated to final judgments against them which would grant full injunctive relief sought by the Commission. In addition, the judgments to which McKee and Dixon have consented would, when entered by the Court, compel each of them to pay full disgorgement of their respective ill gotten gains with prejudgment interest thereon. In addition to his disgorgement, McKee has consented to pay a civil penalty in the amount of his ill-gotten gain, and Dixon has consented to pay a civil penalty in the amount of $50,000. [SEC v. James D. Zeglis, Gautum Gupta, Lance D. McKee and Jim W. Dixon, Civil Action No. 08-cv-5259 (ND Ill.)] (LR-20720A)
First BanCorp's Former CEO and CFO Settle Civil Charges for Aiding and Abetting Fraud By Doral Financial
On September 16, the Commission filed civil charges against Angel Alvarez-Perez and Annie Astor-Carbonell, former officers and directors of First BanCorp, a NYSE-listed bank holding company based in Puerto Rico. The Commission charges Alvarez and Astor with aiding and abetting violations of the federal securities laws by Doral Financial Corporation, another NYSE-listed bank holding company based in Puerto Rico. Alvarez was First BanCorp's Chief Executive Officer, and Astor was the company's Chief Financial Officer, during the relevant period.
According to the Commission's complaint, which was filed in the United States District Court for the Southern District of New York, First BanCorp senior management, including Alvarez and Astor, concealed the true nature of more than $4 billion worth of mortgage-related transactions from the company's independent auditor and the investing public between 2000 and 2005. First BanCorp, which purportedly purchased the mortgages, is alleged to have profited from the transactions by earning over $100 million in net interest income with minimal risk. The contra-party to the transactions, Doral Financial, which purportedly sold the mortgages to First CanCorp, is alleged to have improperly recognized income from the transactions. The Commission further alleges that First BanCorp senior management, including Alvarez and Astor, created and backdated certain documents and affirmatively misrepresented the terms of certain mortgage-related transactions to the company's independent auditor to avoid a restatement in November 2004.
The Commission charges Alvarez and Astor with aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 13a-1 and 13a-13 thereunder and with violating Rules 13b2-1 and 13b2-2 of the Exchange Act. Without admitting or denying the Commission's allegations, Alvarez and Astor consented to being permanently enjoined from violating those provisions of the federal securities laws. In addition, Alvarez consented to a five (5) year officer and director bar and $100,000 civil penalty, and Astor consented to a five (5) year officer and director bar, $75,000 civil penalty and to an administrative order suspending her privilege to appear and practice before the Commission as an accountant for five (5) years.
Doral Financial previously consented to the entry of a court order enjoining it from violating the federal securities laws and ordering that it pay a $25 million civil penalty [LR-19837 (Sept. 19, 2006)]. First BanCorp consented to a similar court order and an $8.5 million civil penalty [LR-20227] (Aug. 7, 2007). The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company. [SEC v. Angel Alvarez-Perez and Annie Astor-Carbonell, 08-CV-8009DAB (Batts, J.) (S.D.N.Y. )] (LR-20721; AAE Rel. 2881)
Former Prudential Securities Registered Representative Pleads Guilty to Criminal Charges in Connection With Deceptive Market Timing Practices
The Commission announced today that on Sept. 15, 2008, Justin F. Ficken, age 33, of Boston, Massachusetts, pled guilty to one count of conspiracy, three counts of wire fraud, and two counts of securities fraud in a case being prosecuted by the United States Attorney's Office in Boston, Massachusetts. These charges resulted from Ficken's role in a scheme to place deceptive market timing trades in mutual funds while working at the Boston branch office of Prudential Securities, Inc. Ficken was indicted on Dec. 19, 2007. The indictment charged that Ficken and others at Prudential Securities disguised their own and their hedge fund customers' identities in order to execute market timing trades that mutual funds were trying to prohibit. He is currently scheduled to be sentenced on December 10, 2008.
The Commission previously filed a civil injunctive action against Ficken and others based on similar conduct. The Commission filed its complaint against Ficken, four other former Prudential Securities registered representatives, and their former branch manager, on November 4, 2003, and amended its complaint on July 14, 2004. The amended complaint alleged that Ficken was part of a three-person group of registered representatives (the Druffner Group) that defrauded mutual fund companies and the funds' shareholders by placing thousands of market timing trades worth more than $1 billion for hedge fund customers from at least January 2001 through September 2003. According to the amended complaint, Ficken knew that the mutual fund companies monitored and attempted to restrict excessive trading in their mutual funds. The amended complaint alleged that, to evade those restrictions when placing market timing trades, Druffner Group members disguised their own identities by establishing multiple broker identification numbers and disguised their customers' identities by opening numerous customer accounts for what were, in reality, only a handful of customers.
On Sept. 13, 2007, the U.S. District Court for the District of Massachusetts entered a final judgment against Ficken after granting the Commission's motion for summary judgment against him. The final judgment enjoined Ficken from future violations of the federal securities laws and ordered him to pay $589,854 in disgorgement and pre-judgment interest. Ficken has appealed that judgment, and that appeal is pending.
On Sept. 26, 2007, the Commission instituted administrative proceedings against Ficken based on the entry of the final judgment in the civil injunctive action to determine what, if any, remedial action was appropriate and in the public interest. On Feb. 20, 2008, Administrative Law Judge Robert G Mahony issued an initial decision granting the Enforcement Division's motion for summary disposition and barring Ficken from association with any broker or dealer or investment advisor. Ficken has appealed that initial decision to the Commission, and that appeal is pending. [U.S. v. Justin Ficken (United States District Court for the District of Massachusetts Criminal No. 1:07-CR-10427-PBS); SEC v. Martin J. Druffner, et. al. (United States District Court for the District of Massachusetts Civil Action No. 03-12154-NMG)] (LR-20722)
Court Enters Final Judgment Against Massachusetts Hedge Fund Manager in Fraud Scheme
The Securities and Exchange Commission announced today that the Massachusetts federal district court entered a Final Judgment by consent on September 16, 2008 against defendant Evan K. Andersen, of Boston, Massachusetts, in connection with a civil injunctive action filed in April 2007 by the Commission against Andersen, his business partner, and Lydia Capital, LLC, a registered investment adviser based in Boston, Massachusetts. The Final Judgment enjoined Andersen, a principal of Lydia, from engaging in future violations of the antifraud provisions of the federal securities laws and holds him liable for $2,350,000 in disgorgement of profits from the conduct alleged in the Commission's complaint, plus prejudgment interest of $177,089, but waived all except $1.8 million of the disgorgement and prejudgment interest, and did not impose a civil penalty, based on Andersen's financial condition.
The Commission originally filed its action against Andersen on April 12, 2007 and filed an amended complaint on May 1, 2007. The amended complaint alleged that from June 2006 through April 2007, Andersen and his business partner, Glenn Manterfield, acting through Lydia, engaged in a scheme to defraud more than 60 investors who invested approximately $34 million in Lydia Capital Alternative Investment Fund LP, a hedge fund managed by Lydia. The amended complaint alleged that the defendants told investors that they intended to use the hedge fund's assets to acquire a portfolio of life insurance polices in the life settlement market. According to the amended complaint, Andersen, Lydia, and Manterfield made a series of material misrepresentations and omissions, including: (1) materially overstating, and in some instances completely fabricating the hedge fund's performance; (2) inventing business partners, offices, and investors in an attempt to legitimatize the firm and concealing the truth as to why key vendors and banks ceased relationships with the defendants; (3) lying about Manterfield's significant criminal history, and failing to disclose a February 2007 criminal asset freeze against him in England; (4) lying about how the hedge fund planned to address certain material risks and failing to disclose others; and (5) misstating the nature of the hedge fund's assets and its investment process. In addition, the amended complaint alleges that Andersen and Manterfield took millions of dollars of investors' funds by withdrawing investor monies to which they were not entitled.
On April 12, 2007, the U.S. District Court issued a temporary restraining order that, among other things, froze the three defendants' assets. On May 3, 2007, the Court issued a preliminary injunction and ordered a continuation of an asset freeze of the defendants' assets.
The Final Judgment permanently enjoined Andersen from violating Section 17(a) of the Securities Act of 1933, 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 of 1940. The Final Judgment further holds Andersen liable for $2,350,000 million in disgorgement of profits gained as a result of the conduct alleged in the complaint, plus prejudgment interest of $177,089, for a total of $2,527,089. The Court, however, waived payment of all of Andersen's disgorgement and prejudgment interest obligations except for $1,800,000, and did not impose a civil penalty, based on his financial condition. Andersen consented, without admitting or denying the allegations, to the entry of the Final Judgment. The Commission's case against Lydia and Manterfield remains pending.
The Commission acknowledges the assistance of the Securities Division of the Secretary of State of the Commonwealth of Massachusetts, which previously filed a separate action against Andersen.
For further information, please see Litigation Release Nos. 20102 (May 3, 2007), 20585 (May 19, 2008) and 20723 (Sept. 17, 2008). [SEC v. Lydia Capital, LLC et al., U.S. District Court for the District of Massachusetts, 07-CV-10712-RGS] (LR-20723)
Outside Directors of Mercury Interactive Settle SEC Charges of Stock Option Backdating
The Commission today filed settled charges against Igal Kohavi, Yair Shamir, and Giora Yaron, three former outside directors of California-based software maker Mercury Interactive, LLC. The SEC's complaint alleges that the outside directors recklessly approved backdated stock option grants and reviewed and signed public filings that contained materially false and misleading disclosures about the company's stock option grants and company expenses. Kohavi, Shamir and Yaron served on the board of directors of the company, formerly known as Mercury Interactive Corporation, from 1997 through 2005. They served on its compensation and audit committees from at least 1997 to 2002.
The SEC's complaint, filed in federal district court for the Northern District of California, alleges that senior management at Mercury engaged in a fraudulent scheme that involved the backdating of 45 stock option grants to employees and executives that concealed hundreds of millions of dollars of compensation expenses on Mercury's financial statements. As alleged, the backdating occurred from as early as 1997 to April 2002, while the overstatements of income that resulted from the backdating continued to appear in the company's financial statements through 2005. According to the SEC's complaint, Kohavi, Shamir and Yaron approved 21 of those grants at the recommendation or with the direct participation of senior Mercury management.
Without admitting or denying the SEC's allegations, Shamir, Yaron and Kohavi each consented to a court order that orders each of them to pay a $100,000 civil penalty and that permanently enjoins each of them from violating the antifraud, proxy, and falsification of books and records provisions of the federal securities laws - Sections 10(b) and 14(a) of the Securities Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 14a-9 - and from aiding and abetting violations of the reporting, books and records and internal controls provisions of the federal securities laws - 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.
The SEC previously filed civil fraud charges in federal district court against Mercury and four of its former senior officers - former Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer - based on the officers' stock option backdating scheme and fraudulent disclosures concerning, among other things, Mercury's "backlog" of sales revenues to manage its reported earnings. Mercury, which was acquired by Hewlett-Packard Company on Nov. 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. The SEC's case against the four former senior Mercury officers is being litigated. See Litigation Release No. 20136 (May 31, 2007). [SEC v. Mercury Interactive, LLC (f/k/a Mercury Interactive Corporation), Amnon Landan, Sharlene Abrams, Douglas Smith, and Susan Skaer, Case No.07-2822 (RS) (N.D.Cal.)] (LR-20136; Press Rel. 2007-108). [SEC v. Igal Kohavi, Yair Shamir, and Giora Yaron, Case No. 08-4348 (RS) (N.D.Cal.)] (LR-20724)
STANDARDS SETTING BOARDS
The Commission approved the Public Company Accounting Oversight Board's proposed new Auditing Standard No. 6, Evaluating Consistency of Financial Statements, and Conforming Amendments. Publication of the approval order is expected in the Federal Register during the week of September 15th. (Rel. 34-58555)
Approval of Proposed Rule Changes
The Commission has issued an order approving a proposed rule change, as modified by Amendment No. 2, filed by the Financial Industry Regulatory Authority (f/k/a National Association of Securities Dealers, Inc.) (SR-NASD-2007-041) to amend the minimum price-improvement standards set forth in NASD Interpretive Material (IM) 2110-2. Publication is expected in the Federal Register during the week of September 15. (Rel. 34-58532)
The Commission approved a proposed rule change (SR-FINRA-2008-036) submitted by Financial Industry Regulatory Authority relating to the Incorporated NYSE Rules. Publication is expected in the Federal Register during the week of September 15. (Rel. 34-58533)
The Commission approved a proposed rule change (SR-NYSE-2008-68) submitted pursuant to Section 19(b)(1) and Rule 19b-4 under the Securities Exchange Act of 1934 by the New York Stock Exchange to determine that a company meets the Exchange's market value requirements by relying on a third-party valuation of the company. Publication is expected in the Federal Register during the week of September 15. (Rel. 34-58550)
Proposed Rule Change
The Boston Stock Exchange filed a proposed rule change (SR-BSE-2008-45) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder, to amend its by-laws. Publication is expected in the Federal Register during the week of September 15. (Rel. 34-58547)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by New York Stock Exchange conforming certain NYSE Rules to changes to NYSE Incorporated Rules recently filed by the Financial Industry Regulatory Authority, Inc. (SR-NYSE-2008-80) 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 September 15. (Rel. 34-58549)
A proposed rule change (SR-BATS-2008-003) filed by BATS Exchange amending BATS Rule 11.5 to provide for a new order type - Modified Destination Specific Orders - 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 September 15. (Rel. 34-58546)
Order Approving and Declaring Effective a Plan for the Allocation of Regulatory Responsibilities Pursuant to Rule 17d-2
The Commission has approved and declared effective a proposed plan for the allocation of regulatory responsibilities pursuant to Rule 17d-2 under the Securities Exchange Act of 1934 relating to the surveillance, investigation, and enforcement of insider trading rules (File No. 4-566) filed by the American Stock Exchange, the Boston Stock Exchange, the CBOE Stock Exchange, the Chicago Stock Exchange, Financial Industry Regulatory Authority, the International Securities Exchange, the NASDAQ Stock Market, the National Stock Exchange, the New York Stock Exchange, NYSE Arca, NYSE Regulation, and the Philadelphia Stock Exchange. Publication is expected in the Federal Register during the week of September 15. (Rel. 34-58536)
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