Commission Sustains Disciplinary Action Against Ronald Pellegrino
The Commission has sustained NASD disciplinary action against Ronald Pellegrino, the former general manager of Metropolitan Investment Securities, Inc. NASD found that Pellegrino failed to establish and maintain an adequate supervisory system at MIS in violation of NASD supervisory rules. For this misconduct, NASD barred Pellegrino from serving in a principal capacity. The Commission found that the record supported NASD's findings of violation. The Commission found further that "NASD appropriately tailored the sanction of a principal bar to remedy and deter Pellegrino's misconduct." (Rel. 34-59125; File No. 3-12941)
Commission Revokes Registration of Securities of American Custom Components, Inc. for Failure to Make Required Periodic Filings
On December 22, the Commission revoked the registration of each class of registered securities of American Custom Components, Inc. (American Custom) for failure to make required periodic filings with the Commission.
Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, American Custom consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to American Custom Components, Inc. finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of American Custom's securities pursuant to Section 12(j) of the Exchange Act. This order settled the charges brought against American Custom in In the Matter of American Custom Components, Inc., et al., Administrative Proceeding File No. 3-13295.
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 . . . .
For further information see Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of American Custom Components, Inc., et al., Administrative Proceeding File No. 3-13295, Exchange Act Release No. 59002 (Nov.24, 2008). (Rel. 34-59128; File No. 3-13295)
In the Matter of George L. Phelps
On December 22, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (Order) against George L. Phelps (Phelps). The Order finds that on December 2, 2008, an order of permanent injunction was entered by consent against Phelps, permanently enjoining him from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-10 thereunder in the civil action entitled Securities and Exchange Commission v. Michael E. Kelly, et al., Civil Action Number 07-cv-4979, in the United States District Court for the Northern District of Illinois. In the Order, the Commission finds that the Commission's complaint alleged that Phelps participated in a massive fraud orchestrated by Michael E. Kelly that victimized thousands of investors across the United States by raising at least $428 million through the offer and sale of fraudulent and unregistered securities called Universal Leases. Universal Leases were securities in the form of investment contracts that were structured as timeshares in several hotels in Cancun, Mexico, coupled with pre-arranged servicing agreements with a purportedly independent leasing agent that promised investors a safe investment and guaranteed returns. The complaint alleged that Phelps offered and sold Universal Leases to investors and recruited others to do so. The complaint further alleged, among other things, that Phelps made false and misleading statements about the safety of the Universal Leases and about the purportedly independent leasing agent and also failed to make required disclosures about the commissions he was being paid for his Universal Lease sales.
Based on the above, the Order bars Phelps from association with any broker or dealer. Phelps consented to the issuance of the Order without admitting or denying any of the findings in the Order except as to the entry of the order of permanent injunction against him, which he admitted. (Rel. 34-59130; File No. 3-13315)
Commission Sustains NASD Disciplinary Action Against Jason A. Craig
The Commission has sustained disciplinary action taken by NASD against Jason A. Craig, formerly associated with Hantz Financial Services, Inc., an NASD member firm. NASD found that Craig willfully failed to disclose four felony charges and one misdemeanor conviction on his Uniform Application for Securities Industry Registration (Form U4) in violation of NASD Membership Rule IM-1000-1 and Conduct Rule 2110. NASD barred Craig from associating with any member firm in any capacity.
The Commission concluded that Craig violated NASD rules when he failed to disclose four felony charges and a conviction for misdemeanor larceny on his Form U4. The Commission stated that Craig's actions in causing the filing of a misleading and inaccurate Form U4 were "egregious and intentional" and that Craig "impeded Hantz from adequately screening his application." The Commission found that, given Craig's conduct, the sanction imposed by NASD was neither excessive nor oppressive. (Rel. 34-59137; File No. 3-12952)
SEC Settles Pending Enforcement Action in Bank IPO Fraud
The Commission announced that it has reached a settlement with the final defendant in an enforcement action relating to the initial public offering of NewAlliance Bancshares, Inc. John M. Lucarelli, 36, a resident of Greenwich, Connecticut, agreed to the entry of a final judgment in a pending civil injunctive action that would order him to pay disgorgement plus prejudgment interest totaling $18,450 and a civil penalty of $25,000. That judgment was entered on Dec. 12, 2008.
The Commission's complaint, filed in U.S. District Court in New Haven, Connecticut, alleges that Lucarelli and his co-defendants engaged in a fraudulent scheme in connection with the initial public offering of NewAlliance Bancshares, Inc. The complaint alleges that the defendants illegally purchased stock in the NewAlliance IPO in violation of the federal securities laws. In particular, the complaint alleges that, beginning in or about February 2004, Robert Ross, one of Lucarelli's co-defendants orchestrated a scheme in which he and others used seven depositors of New Haven Savings Bank to illegally obtain 490,000 shares of NewAlliance Bancshares stock at the initial offering price of $10 per share. According to the complaint, Ross recruited Lucarelli to locate depositors who would be willing to enter into arrangements with Ross. The complaint further alleges that, as a result of this fraudulent conduct, the scheme generated approximately $1.75 million in total profits.
In related administrative proceedings, Lucarelli consented to issuance of an Order finding that six depositors (three located by Lucarelli and relatives thereof) entered into agreements with one of the individuals who funded the stock purchases pursuant to which that individual provided each depositor with $700,000 to purchase NewAlliance stock in the IPO, the depositors agreed to transfer all NewAlliance stock they received in the IPO to the funding source or his designees, and the depositors would receive 20% of the profits from the sale of the NewAlliance stock as determined by the funding source. The Order also found that, by entering into these agreements, the funding source violated the federal securities laws. As a result of this conduct, according to the Order, other eligible NHSB depositors who were entitled to receive stock in the IPO were deprived of at least some NewAlliance stock to which they otherwise would have been entitled. The Order finds that, as a result of this conduct, Lucarelli violated Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and that those violations were willful. The Order requires him to cease and desist from committing and causing any violations and any future violations of these provisions and suspends him from associating with any broker or dealer for 12 months.
For further information, please see Litigation Release No. 19288 (June 28, 2005), Litigation Release No. 19444 (Oct. 25, 2005), Litigation Release No. 19714 (June 1, 2006), Litigation Release No. 19797 (Aug. 9, 2006), and the Investor Alert the Commission issued on June 28, 2005. The Investor Alert is available at: www.sec.gov/investor/pubs/mutualconversion.htm. [SEC v. Robert R. Ross,et al., Civil Action No. 3:05cv1036 (JBA) (D. Conn.)] (LR-20833)
Commission Obtains Preliminary Injunction, Asset Freeze, and Other Relief Against Defendants
The United States Securities and Exchange Commission announced that on Dec. 18, 2008, the Honorable Judge Louis L. Stanton, a federal judge in the Southern District of New York, entered a preliminary injunction order, by consent, against Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (BMIS). The preliminary injunction continues to restrain Madoff and BMIS from violating certain antifraud provisions of the federal securities laws. Also, by consent, Judge Stanton ordered that assets remain frozen until further notice, continued the appointment of a receiver for two entities owned or controlled by Madoff in the United Kingdom (while defendant BMIS remains subject to oversight by a SIPC trustee), and granted other relief. The preliminary injunction order continues the relief originally obtained on Dec. 12, 2008, in response to the Commission's application for emergency preliminary relief that sought a temporary restraining order, an order freezing assets, and other relief against Madoff and BMIS based on his alleged violations of the federal securities laws.
The SEC's complaint, filed on Dec. 11, 2008, in federal court in Manhattan, alleges that the defendants have committed a $50 billion fraud and violated 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 Advisers Act of 1940. The complaint alleges that Madoff last week informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.
The Commission continues to seek, among other things, a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and civil money penalties. [SEC v. Bernard L. Madoff And Bernard L. Madoff Investment Securities Llc (S.D.N.Y. Civ. 08 Cv 10791 (Lls))] (LR-20834)
SEC Files Settled Books and Records and Internal Controls Charges Against Fiat S.p.A. and CNH Global N.V. For Improper Payments to Iraq Under the U.N. Oil for Food Program - - Fiat Agrees to Pay Over $10 Million in Disgorgement, Interest, and Penalties
The Securities and Exchange Commission today filed Foreign Corrupt Practices Act books and records and internal controls charges against Fiat S.p.A. and CNH Global N.V. in the U.S. District Court for the District of Columbia. Fiat S.p.A., an Italian company, provides automobiles, trucks and commercial vehicles. CNH Global N.V., a majority-owned subsidiary of Fiat, provides agricultural and construction equipment. The Commission's complaint alleges that from 2000 through 2003, certain Fiat and CNH Global subsidiaries made approximately $4.3 million in kickback payments in connection with their sales of humanitarian goods to Iraq under the United Nations Oil for Food Program (the "Program"). The kickbacks were characterized as "after sales service fees" ("ASSFs"), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Fiat's and CNH Global's subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in countries such as Jordan.
According to the Commission's Complaint:
During the Oil for Food Program, Fiat's subsidiary, IVECO S.p.A., used its IVECO Egypt office to enter into four direct contracts with Iraqi ministries in which $1,803,880 in kickbacks were made on the sales of commercial vehicles and parts. After agreeing to pay the ASSFs, IVECO Egypt increased its agent's commissions from five percent to between fifteen and twenty percent of the total U.N. contract price, which the agent funneled to Iraq as kickbacks. The agent submitted invoices for the inflated commissions, and IVECO financial documents show line items for "contract pay-back" due to the agent. IVECO and the agent secretly inflated the U.N. contracts by ten to fifteen percent. Despite the agent's invoices being held for one year and the unusually large commissions, IVECO paid the invoices. In one instance, IVECO set up a bank guarantee in the amount of the ASSF in favor of a Dubai-based firm that operated as a front company for Iraq. IVECO's bank guarantee was canceled and, instead, the agent established an identical bank guarantee to conceal IVECO's role. A line item identified as "pay-back" on IVECO documents corresponded to the amount of the agent's bank guarantee. The ASSFs were incorrectly recorded as legitimate commissions on the company's books and records.
Beginning in November 2000, IVECO changed its method of doing business for future contracts by making the agent its distributor. As a distributor, the agent purchased equipment directly from IVECO for its own account, and in turn, the agent sold IVECO trucks and parts to Iraq under its own inflated contracts to the U.N. With IVECO's knowledge, the agent facilitated $1,364,080 in ASSFs on twelve additional contracts. Through this mechanism, IVECO was able to move its goods into Iraq, but keep itself distanced from any involvement in the ASSF scheme. IVECO knew or should have known from its direct sales to Iraq that the agent's sales of IVECO products included ASSFs. In correspondence with the U.N., the agent conceded that it paid ASSFs on the contracts and confirmed that the payments were made through Al Rafidain Bank.
In mid-2001, CNH Global subsidiary Case France engaged in three direct transactions with Iraqi ministries in which $187,720 in kickbacks were made on the sale of construction equipment. Armed Iraqi officials approached Case France's Baghdad facility reiterating its request for kickbacks. Case France then entered into a side letter agreeing to pay kickbacks. The side letter was not disclosed to the U.N. To generate funds to pay the kickbacks and to conceal the ASSFs, Case France and its agent secretly inflated the U.N. contracts by approximately ten percent. Case France inflated its commission payments to its distributor, who then forwarded the excess funds to Iraq as kickbacks. Case France did not record the kickbacks on its books and records.
Between December 2000 and May 2001, CNH Global subsidiary New Holland engaged in two direct transactions with Iraqi ministries in which $447,116 in kickbacks were made on the sale of tractors. To generate funds to pay the kickbacks and to conceal the ASSFs, New Holland secretly inflated the U.N. contracts by approximately ten percent. On one contract, New Holland obtained a bank guarantee in favor of the Iraqi ministry in the amount of the ASSF. The ASSFs were recorded as cost of goods sold in New Holland's books and records. Soon after the two direct contracts were negotiated, New Holland ceased entering into direct sales to Iraq. After an Iraqi official inquired why the company no longer conducted business in Iraq, New Holland resumed its business but in a manner that distanced itself from the ASSFs. New Holland made its dealer a distributor, which allowed the dealer to purchase New Holland goods for the dealer's own account. The dealer, in turn, then sold New Holland products to Iraq under the dealer's own secretly inflated U.N. contracts. A November 2001, correspondence from the dealer to New Holland discussed the fact that New Holland's direct sales to Iraq remain impracticable as long as the "famous 10" (a reference to the ten percent kickback) was required, and showed the dealer could make the payment rather than New Holland. With New Holland's knowledge, the dealer facilitated ASSF payments totaling $576,861 to Iraq on three U.N. contracts. An additional $312,198 ASSF payment on a fourth contract was authorized, but never received by Iraq.
Fiat and CNH Global failed to maintain adequate systems of internal controls to detect and prevent the payments and their accounting for these transactions failed properly to record the nature of the payments. Fiat and CNH Global, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining Fiat and CNH Global from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and ordering Fiat to disgorge $5,309,632 in profits plus $1,899,510 in pre-judgment interest plus a civil penalty of $3,600,000. Fiat will also pay a $7,000,000 penalty pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section. The Commission considered remedial acts promptly undertaken by Fiat and CNH Global and the cooperation the companies afforded the Commission staff in its investigation. The Commission acknowledges the assistance of the Department of Justice, Fraud Section and the United Nations Independent Inquiry Committee. [SEC v. Fiat S.p.A. and CNH Global N.V., Civil Action No. 08 CV 02211 (D.D.C.) (CKK)] (LR-20835)
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