RULES AND RELATED MATTERS
SEC Publishes Proposed IFRS "Roadmap"
The Securities and Exchange Commission published a proposing release on Friday, November 14 that includes a proposed roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board by U.S. issuers for purposes of their filings with the Commission. The proposing release was the subject of an open meeting of the Commission held on Aug. 27, 2008.
The proposed multi-year plan sets out several milestones that, if achieved, could lead to a decision in 2011 on whether to proceed with rulemaking to require adoption of IFRS by U.S. issuers, if the Commission believes it to be in the public interest and for the protection of investors. As part of the roadmap, the release contains a rule proposal that would permit the use of IFRS by a limited number of U.S. issuers where this would enhance the comparability of financial information to investors.
Public comment on the proposal should be received by the Commission no later than 90 days after publication in the Federal Register. (Rel. 33-8982; 34-58960; File No. S7-27-08)
In the Matter of MB Tech, Inc.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default (Default Order) in MB Tech, Inc., Administrative Proceeding No. 3-13260. The Order Instituting Proceedings (OIP) alleged that MB Tech, Inc., failed repeatedly to file required financial reports while their securities were registered with the Securities and Exchange Commission.
The Default Order finds these allegations in the OIP to be true as to the Respondent. It revokes the registrations of each class of registered securities of MB Tech, Inc., pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-58972; File No. 3-13260)
SEC Charges Banker and Brokerage Executives With Multimillion Dollar Financial Fraud
On November 18, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging four individuals with engaging in a fraudulent scheme to overvalue the commodity derivatives trading portfolio at Bank of Montreal (BMO), and thereby inflate BMO's publicly reported financial results. The defendants include a former senior derivatives trader at BMO and the top two senior executive officers of Optionable, Inc. (Optionable), a publicly traded commodities brokerage firm.
The defendants named in the Commission's complaint are:
David Lee (Lee), age 36, resides in New Jersey. Lee was a natural gas options trader employed by BMO Capital Markets Corp., a wholly-owned subsidiary of BMO and a registered broker-dealer, until he resigned on May 15, 2007. From 2001 through 2004, Lee was a Vice President of BMO's Commodity Derivatives Group, the unit through which BMO traded commodity derivatives. In 2005, he was promoted to Managing Director of that group.
Kevin P. Cassidy (Cassidy), age 49, resides in Bedford Hills, New York. Cassidy was one of Optionable's founders and served as Vice Chairman of Optionable's board of directors until he resigned on May 12, 2007. Except for the period from March 2004 to October 2005, he was also Optionable's CEO throughout the relevant period.
Edward O'Connor (O'Connor), age 55, resides in Briarcliff Manor, New York. O'Connor was one of Optionable's founders and since 2001, he has served as President and a director of Optionable. From March 2004 through October 2005, he was also Optionable's CEO and Treasurer.
Scott Connor (Connor), age 31, resides in Rye, New York. Connor was employed by Optionable as a commodities broker until May 2007.
The Commission's complaint specifically alleges as follows:
Lee fraudulently overvalued BMO's portfolio of natural gas options by deliberately "mismarking" trading positions for which market prices were unavailable. Lee recorded inflated values that were then purportedly validated by Optionable, which held itself out to BMO and the public as a legitimate provider of independent derivatives valuation services. In fact, Cassidy, O'Connor and Connor schemed with Lee to have Optionable simply rubber-stamp whatever inflated values Lee recorded. After the scheme was discovered, BMO restated its financial results by reducing net income for the first quarter of its 2007 fiscal year by approximately $237 million Canadian dollars ($204 million USD), which reflects a 68% overstatement of BMO's net income for that quarter.
BMO was Optionable's largest customer, and BMO trades accounted for as much as 60% of Optionable's commodity brokerage business. Lee's trading accounted for virtually all of BMO's business with Optionable. As a result, Optionable's management, led by Cassidy, was willing to do whatever it took to keep Lee satisfied. When market prices were unavailable, BMO's risk management personnel sought to verify the accuracy of BMO's commodity derivatives traders' valuations of their positions, or their "marks," by obtaining supposedly independent valuations, or "quotes," for those positions from one or more third parties. During the relevant period, Optionable was the primary source of the third-party quotes that BMO used to validate Lee's marks. Lee provided his marks directly to Cassidy, O'Connor or Connor, who then simply forwarded Lee's marks, virtually unchanged, to BMO's risk management department as if they were Optionable's independent quotes. At first, Lee used this "u-turn" scheme to boost his trading profits and incentive compensation, but in 2006, the market turned against Lee and he used the scheme to hide substantial trading losses. In May 2007, BMO concluded that due to the Optionable scheme and other positions that Lee had also mismarked, Lee's trading book was overvalued by an aggregate total of $680 million (CAD) since the beginning of BMO's fiscal year ended Oct. 31, 2006.
Cassidy and O'Connor also defrauded Optionable's public shareholders by concealing Optionable's role in the scheme. Optionable's periodic reports touted the synergistic benefits of the derivatives valuation services that Optionable purportedly provided to multiple brokerage clients, but those reports, which Cassidy and O'Connor signed, never disclosed that BMO was the principal client for whom those "services" were performed and that the "valuation services" provided to BMO were a sham designed to defraud BMO. In addition, Cassidy and O'Connor defrauded the New York Mercantile Exchange (NYMEX) by selling over $10 million of their own Optionable stock to NYMEX in April 2007. Both Cassidy and O'Connor represented to NYMEX that Optionable's periodic reports were materially accurate, but they never disclosed anything about their scheme with Lee to defraud the shareholders of BMO, Optionable's largest customer. On May 9, 2007, one day after BMO announced that it had placed Lee on leave and suspended its business relationship with Optionable, Optionable issued an announcement stating that the suspension would have an adverse effect on Optionable's business. Optionable's stock price fell almost 40% that day, from $4.64 to $2.81 per share, and dropped to below 50 cents per share one week later after Cassidy's prior criminal record was disclosed in press reports.
All four defendants are charged with committing violations of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder; and with aiding and abetting BMO's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-16. The complaint further charges Cassidy, O'Connor and Connor with aiding and abetting Optionable's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13, and also charges Cassidy and O'Connor with violating Rules 13a-14 and 13b2-2 under the Exchange Act and Section 17(a) of the Securities Act of 1933. As to each defendant, the complaint seeks a permanent injunction against future violations, disgorgement of ill-gotten gains plus prejudgment interest, and civil monetary penalties. The complaint also seeks an order barring Cassidy and O'Connor from acting as officers or directors of a public company.
The United States Attorney's Office for the Southern District of New York (USAO), the New York County District Attorney's Office (NYCDA), and the United States Commodity Futures Trading Commission (CFTC) also filed parallel criminal and regulatory charges today arising from the same conduct that is alleged in the Commission's complaint. Lee pled guilty to parallel criminal charges filed by the USAO and the NYCDA. In connection with his guilty plea, Lee agreed to pay a total of $4.41 million in forfeiture.
Lee has agreed to settle the SEC charges by consenting, without admitting or denying the SEC's allegations, to the entry of a permanent injunction against future violations of various provisions of the federal securities laws. The Commission's claims for disgorgement and civil penalties against Lee, and all of its claims against the other three defendants, remain pending.
The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation of the USAO, NYCDA, CFTC and the Federal Bureau of Investigation. [SEC v. David Lee, et al., Civil Action No. 08-CIV-9961 (GBD), SDNY] (LR-20811; AAE Rel. 2901)
First Circuit Court of Appeals Dismisses Appeal of Brian M. Adley, Former Chairman and CEO of Chancellor Corporation
The Securities and Exchange Commission announced that on Nov. 3, 2008, the United States Court of Appeals for the First Circuit dismissed the appeal of defendant Brian M. Adley, the former Chairman and Chief Executive Officer of Chancellor Corporation, of a judgment that was entered against him in January 2008 in a securities fraud action.
The Commission originally filed an action against Adley and ten other defendants on April 24, 2003, in the United States District Court for the District of Massachusetts. The Commission's complaint alleged that Adley caused Chancellor to file false financial statements in 1999 and 2000. By the fall of 2007, all defendants other than Adley had settled the case with the Commission. After a three week trial, on Nov. 26, 2007, a Massachusetts federal court jury found Adley liable for violating the antifraud and record-keeping provisions of the federal securities laws, for making false statements to Chancellor's accountants, and for aiding and abetting Chancellor's reporting and recordkeeping provisions of the federal securities laws. SEC v. Chancellor Corporation, et al., (United States District Court for the District of Massachusetts, C.A. No. 03-10762-PBS).
On Jan. 3, 2008, the District Court entered a Final Judgment against Brian Adley for his role in the multi-faceted financial fraud. The District Court ordered that Adley be enjoined from future violations of the federal securities laws, that he pay $930,000 in disgorgement and that Adley be barred from acting as an officer or director of a public company for twenty-years. Thereafter, on February 27, 2008, Adley filed a Notice of Appeal. The First Circuit Court of Appeals notified Adley on October 3, 2008, that he was in default for failure to file an opening brief in his appeal, and warned him to file the brief by October 20 or face dismissal. Adley failed to file the required brief. The First Circuit dismissed his appeal on November 3. [SEC v. Chancellor Corporation, et al., United States Court of Appeals (1st Cir.) No. 08-1347] (LR-20812; AAE Rel. 2902)
INVESTMENT ADVISERS ACT RELEASES
WLD Enterprises, Inc.
An order has been issued to WLD Enterprises, Inc. under Section 202(a)(11)(G) of the Investment Advisers Act . The order declares WLD Enterprises, Inc., certain of its affiliates, and their respective employees acting within the scope of their employment to be persons not within the intent of Section 202(a)(11). (Rel. IA-2807)
Approval of Proposed Rule Change
The Commission granted approval of a proposed rule change (SR-DTC-2008-09) filed by the Depository Trust Company under Section 19(b)(1) of the Securities Exchange Act of 1934 to expand DTC's debit cap look-ahead process for money market instruments. Publication is expected in the Federal Register during the week of November 17. (Rel. 34-58944)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change (SR-CBOE-2008-109) filed by Chicago Board Options Exchange consolidating into a single rule certain requirements for products traded on the Exchange pursuant to unlisted trading privileges 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 November 17. (Rel. 34-58955)
The NYSE Arca filed a proposed rule change (SR-NYSEArca-2008-119), which became effective upon filing, under Section 19(b)(1) of the Exchange Act to amend NYSE Arca equities rules governing the anti-money laundering compliance program. Publication is expected in the Federal Register during the week of November 17. (Rel. 34-58957)
The NYSE Arca filed a proposed rule change (SR-NYSEArca-2008-120), which became effective upon filing, under Section 19(b)(1) of the Exchange Act to amend NYSE Arca options rules governing the anti-money laundering compliance program. Publication is expected in the Federal Register during the week of November 17. (Rel. 34-58959)
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