SEC News Digest

ENFORCEMENT PROCEEDINGS

In the Matter of Ferris Baker Watts, Inc.

On February 10, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against Ferris Baker Watts, Inc. (Ferris). The Order finds that Ferris is both a registered broker-dealer and a registered investment adviser, and that Ferris has over 600 employees, including over 250 registered representatives working in over forty branch offices in eight states and the District of Columbia.

The Order finds that from at least August 2002 through November 2005, Ferris registered representative Stephen Glantz (Glantz), one of Glantz's customers, David A. Dadante (Dadante), and a registered representative at another brokerage firm, all participated in a scheme to manipulate the market for the stock of Innotrac Corp. (Innotrac), a thinly traded NASDAQ National Market security in which Ferris made a market. The Order also finds that all three pled guilty to violations of Section 10(b) of the Securities Exchange Act of 1934 and in their plea agreements, they all admitted that they artificially inflated and maintained the price for Innotrac stock. The Order further finds that, acting in concert, Glantz, Dadante, and the other registered representative employed a variety of manipulative trading practices, including marking the closing price for Innotrac stock, engaging in matched and wash trades, and attempting to artificially create downbids to suppress short selling of Innotrac. The Order also finds that to perpetrate the manipulative scheme, and to generate income for himself, Glantz also engaged in unauthorized and unsuitable trading in Innotrac and certain other securities in the accounts of customers other than Dadante's unregistered IPOF Fund. The Order further finds that in February of 2005, Glantz engaged in unauthorized and manipulative transactions in the stock of ATC Healthcare, Inc. (ATC Healthcare).

The Order finds that certain Ferris Senior Executives permitted Glantz to work under a special arrangement which allowed him greater freedom of action than other registered representatives at Ferris. The Order finds that Glantz, a retail broker assigned to Ferris' Beachwood, Ohio branch office, was permitted to work at Ferris' Institutional Trading Desk in Baltimore several days a week, and that Glantz took advantage of that special arrangement to evade Ferris' supervisory procedures. The Order further finds that during the period of Glantz's misconduct at Ferris, Ferris failed to design reasonable systems to implement its written supervisory policies and procedures with respect to the special arrangement under which Glantz was permitted to work. The Order also finds that the information available to Ferris regarding the manipulative practices involving the trading in Innotrac, including red flags raised in a May 23, 2003 Ferris Compliance Department memorandum and a Dec. 15, 2004 memorandum recommending that Glantz be terminated, as well as Ferris' Anti-money Laundering Officer's observations regarding the ATC Healthcare trades, should have suggested to Ferris that it was required to generate and file Suspicious Activity Reports (SARs) with the U.S. Department of Treasury's Financial Crimes Enforcement Network. The Order further finds that Ferris failed to file SARs related to the manipulative practices in Innotrac stock and the suspicious trades in ATC Healthcare.

The Order finds, as a result of this conduct, that Ferris failed reasonably to supervise Glantz with a view to detecting and preventing Glantz's violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, and willfully violated Section 17(a) of the Exchange Act and Rule 17a-18 thereunder by failing to file SARs. Based on the above, the Order: (1) orders that Ferris cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 promulgated thereunder; (2) censures Ferris; (3) orders Ferris to pay disgorgement of $222,183 and prejudgment interest of $78,473, for a total of $300,656, to the United States Treasury; and (4) orders Ferris to pay a civil money penalty in the amount of $500,000 to the United States Treasury. Ferris consented to the issuance of the Order without admitting or denying any of the findings in the Order, except as to the Commission's jurisdiction over it and the subject matter of the proceedings, which Ferris admitted. (Rel. 34-59372; IA-2837; File No. 3-13364)

In the Matter of Stephen J. Glantz

On February 10, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Stephen J. Glantz. The Order finds that from January 2003 through November 2005, Glantz was a registered representative associated with Ferris Baker Watts, Inc., a broker-dealer and investment adviser registered with the Commission which maintained offices in various states, including Ohio and Maryland.

The Order finds that on Sept. 26, 2007, Glantz pled guilty to one count of securities fraud in violation of Title 15 United States Code, Sections 78j(b) and 78ff, and one count of making false statements, Title 18 United States Code, Section 1001, before the United States District Court for the Northern District of Ohio, in United States v. Stephen J. Glantz, Case No. 1:07-CR-464. The Order also finds that on Dec. 21, 2007, a judgment in the criminal case was entered against Glantz and he was sentenced to a prison term of 33 months followed by three years of supervised release and ordered to pay restitution in the amount of $110,336.31. The Order further finds that the counts of the criminal information to which Glantz pled guilty alleged, among other things, that Glantz defrauded investors and obtained money and property by engaging in manipulative and deceptive trading activity, and that in connection with that trading activity made use of a national securities exchange, and that Glantz made false statements to federal government agents.

Based on the above, the Order bars Glantz from association with any broker, dealer, or investment adviser. Glantz consented to the issuance of the Order without admitting or denying any of the findings in the Order, except as to the Commission's jurisdiction over him and the subject matter of the proceedings and his guilty plea and the criminal judgment against him, which he admitted. (Rel. 34-59373; IA-2838; File No. 3-13365)

In the Matter of William H. Salem

On February 10, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against William H. Salem. The Order finds that from at least January 2003 through November 2005, Salem was a registered representative associated with Advest, Inc., a broker-dealer and investment adviser registered with the Commission which maintained offices in various states, including Ohio.

The Order finds that on Jan. 11, 2008, Salem pled guilty to one count of securities fraud in violation of Title 15 United States Code, Sections 78j(b) and 78ff, and one count of making false statements, Title 18 United States Code, Section 1001, before the United States District Court for the Northern District of Ohio, in United States v. William H. Salem, Case No. 1:07-CR-627. The Order also finds that on April 3, 2008, a judgment in the criminal case was entered against Salem and he was sentenced to a prison term of one month followed by two years of supervised release and ordered to pay restitution in the amount of $5,000.00. The Order further finds that the counts of the criminal information to which Salem pled guilty alleged, among other things, that Salem defrauded investors and obtained money and property by engaging in manipulative and deceptive trading activity, and that in connection with that trading activity made use of a national securities exchange, and that Salem made false statements to federal government agents.

Based on the above, the Order bars Salem from association with any broker, dealer, or investment adviser. Salem consented to the issuance of the Order without admitting or denying any of the findings in the Order, except as to the Commission's jurisdiction over him and the subject matter of the proceedings and his guilty plea and the criminal judgment against him, which he admitted. (Rel. 34-59374; IA-2839; File No. 3-13366)

In the Matter of Patrick J. Vaughan

On February 10, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Patrick J. Vaughan. The Order finds that during the period January 2003 through November 2005, Vaughan was associated with Ferris Baker Watts, Inc. (Ferris), a broker-dealer and investment adviser registered with the Commission, as the firm's Director of Retail Sales.

The Order finds that from at least August 2002 through November 2005, Ferris registered representative Stephen J. Glantz (Glantz), David A. Dadante (Dadante), one of Glantz's customers, and a registered representative at another brokerage firm, all participated in a scheme to manipulate the market for the stock of Innotrac Corp. (Innotrac). The Order further finds that all three pled guilty to violations of Section 10(b) of the Securities Exchange Act of 1934 and in their plea agreements, they all admitted that they artificially inflated and maintained the price for Innotrac stock. The Order also finds that, acting in concert, Glantz, Dadante, and the other registered representative employed a variety of manipulative trading practices, including marking the closing price for Innotrac stock, engaging in matched and wash trades, and attempting to artificially create downbids to suppress short selling of Innotrac. The Order further finds that to perpetrate the manipulative scheme, and to generate income for himself, Glantz also engaged in unauthorized and unsuitable trading in Innotrac and certain other securities in the accounts of his customers.

The Order finds that Vaughan was one of the highest level supervisors for Ferris' retail brokers and had the requisite degree of responsibility, ability or authority at Ferris to affect the conduct of Glantz. The Order further finds that Vaughan failed to respond reasonably to red flags regarding Glantz's misconduct and lack of supervision, including those raised in a May 23, 2003 Ferris Compliance Department memorandum and a Feb. 4, 2004 memorandum to Ferris' Credit Committee. The Order finds that as a result of this conduct, Vaughan failed reasonably to supervise Glantz with a view to detecting and preventing Glantz's violations of 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.

Based on the above, the Order: (1) suspends Vaughan from association in a supervisory capacity with any broker, dealer, or investment adviser for a period of six months; (2) orders Vaughan to pay disgorgement of $12,721 and prejudgment interest of $3,906, for a total of $16,627, to the United States Treasury; and (3) orders Vaughan to pay a civil money penalty in the amount of $50,000 to the United States Treasury. Vaughan consented to the issuance of the Order without admitting or denying any of the findings in the Order, except as to the Commission's jurisdiction over him and the subject matter of the proceedings, which he admitted. (Rel. 34-59375A; IA-2842A; File No. 3-13367)

SEC Charges Website Operator in Washington State With Running Ponzi Scheme

The Commission today filed securities fraud and other charges against Quest Holdings, Inc. and its principal, Craig T. Jolly, of Spokane, Washington, for operating an internet-based Ponzi scheme promising monthly returns of up to 19.5 percent.

According to the complaint, defendants Quest and Jolly raised approximately $4 million from more than 200 investors, located throughout the country and abroad, through the issuance of short-term securities promising monthly interest rates as high as 19.5 percent. Jolly raised funds by offering and selling Quest securities through Quest's website, EarnByLoaning.com. As set forth in the complaint, Jolly claimed to be active in the investment community and financial markets and falsely assured investors that Quest had a reserve fund to ensure that they would be repaid.

In reality, the Commission alleges, Jolly invested only about one-third of the investor funds he received, on which he suffered hundreds of thousands of dollars in trading losses. The complaint also alleges that defendants operated a Ponzi scheme and repaid purported profits to investors from funds provided by later investors, not from earnings on Quest's investment activities. In addition, the Commission alleges that Jolly misappropriated at least $628,000 of investor funds, which he used for his own stock trading and to pay for his vehicles, medical bills and other personal expenses.

The Commission's complaint, filed in federal district court for the Eastern District of Washington, charges Quest and Jolly with violating the antifraud and registration provisions of the federal securities laws, and seeks entry of an order for an asset freeze, injunctions, an accounting, disgorgement, and civil penalties.

The Commission's litigated action against Jolly and Quest charges both with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions, an accounting, appointment of a receiver, an asset freeze, disgorgement with prejudgment interest, and civil monetary penalties. [SEC v. Craig T. Jolly and Quest Holdings, Inc., Case No. CV-09-38-EFS (E.D. Wash. filed Feb. 9, 2990)] (LR-20890)

Final Judgment Entered Against Former Officer of MetLife, Inc. Subsidiary New England Financial Charged in Fraudulent Scheme to Hide Expenses

The Commission announced today that on February 9, the United States District Court for the District of Massachusetts entered a final judgment by consent against Thom A. Faria, of Needham, Massachusetts, the last defendant in a financial fraud case filed in April 2006. Faria is a former officer of MetLife, Inc. and its insurance company subsidiary New England Financial (NEF). The Commission's action charged that Faria and two other defendants engaged in a scheme to improperly hide NEF expenses that led directly to the publication of materially false financial statements by MetLife and NEF. Faria, who was the former president of the NEF distribution channel and a senior vice president of MetLife, settled the matter without admitting or denying the Commission's allegations. He consented to the entry of a final judgment enjoining him from future violations of the federal securities laws, ordering him to pay a total of over $97,000 in disgorgement, prejudgment interest and civil penalties, and barring him from serving as an officer or director of a public company for five years.

The Commission's complaint, filed on April 13, 2006, alleges that over a period of years, Faria and two other defendants engaged in a scheme to hide certain NEF expenses in an effort to make NEF appear more efficient than it actually was. The complaint alleges that defendants hid certain non-commission expenses by reclassifying them as commission expenses in NEF's internal books and records. The complaint alleged that Faria was aware of and authorized the improper reclassifications. All told, the complaint alleges that the scheme resulted in the improper reclassification of over $100 million in NEF expenses, the direct result of which was the publication of materially false overstatements of MetLife and NEF net income in financial statements filed with the Commission from 2000 to 2003.

The complaint alleged that through his fraudulent conduct, Faria violated Section 17(a) of the Securities Act of 1933 (Securities Act), 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 Section 34(b) of the Investment Company Act of 1940 ("Investment Company Act"), as well as aided and abetted uncharged MetLife violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint also alleged that Faria aided and abetted uncharged MetLife/NEF violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Without admitting or denying the allegations of the complaint, Faria consented to the entry of a final judgment that (1) permanently enjoins him from future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and Section 34(b) of the Investment Company Act, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder; (2) requires him to pay a civil penalty of $40,000; (3) requires him to disgorge $40,687, plus pre-judgment interest in the amount of $16,652.95; and (4) bars him from serving as an officer and director of a public company for five years.

Faria's two co-defendants, former NEF employees Stephen McLaughlin and William Stickney, previously agreed to settle the Commission's charges. Judgments by consented were entered against Stickney in July 2007 and McLaughlin in October 2007. [SEC v. Thom A. Faria, Stephen J. McLaughlin and William M. Stickney (United States District Court for the District of Massachusetts, Civil Action No. 06-10657-WJY) (LR-20891)

SEC Charges Tulsa Lawyer, Former Dallas Broker, and Canadian Stock Promoter in Stock Manipulation Scheme

Today, the Commission filed a civil enforcement action against Tulsa attorney George David Gordon; Dallas, Texas resident Joshua Lankford; and Canadian Dean Sheptycki for their roles in a scheme to defraud the public by manipulating the share prices of three penny stocks (National Storm Management Group, Inc. (NLST), Deep Rock Oil and Gas, Inc. (DPRK), and Global Beverages Solutions, Inc. (GBVS) collectively referred to as "Target Stocks"). The Commission charged Gordon and Lankford with violating the antifraud and stock registration provisions of the United States securities laws and charged Sheptycki with aiding and abetting Gordon and Lankford's violations of the antifraud provisions.

The complaint charges Gordon and Lankford with violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act), and seeks a permanent injunction, disgorgement, prejudgment interest, a civil penalty, and a penny stock bar. The complaint charges Sheptycki with aiding and abetting Mark B. Lindberg, Gordon, and Lankford's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act, and seeks a permanent injunction, disgorgement, prejudgment interest, a civil penalty, and a penny stock bar.

On July 14, 2008, the Commission filed a related, settled enforcement action against Mark B. Lindberg. See Litigation Release LR- 20645.

The Commission acknowledges the assistance of the U.S. Attorney's Office for the Northern District of Oklahoma; The U.S. Department of Justice, Criminal Division, Fraud Section; the Federal Bureau of Investigation; the Internal Revenue Service; the U.S. Postal Inspection Service; FINRA; the Hong Kong Securities and Futures Commission; the Securities Commission of the Bahamas; and the United Kingdom Financial Services Authority. [SEC v. George David Gordon, Joshua Wayne Lankford, and Dean Joseph Sheptycki, Civil Action No. 09 CV 061 CVE TLW (N.D. Okla.] (LR-20892)

SEC Charges Hedge Fund Managers Grant Ivan Grieve, Finvest Asset Management, LLC, and Finvest Fund Management, LLC with Securities Fraud

The Commission today filed a civil injunctive action in the United States District Court for the Southern District of New York charging Grant Ivan Grieve, Finvest Asset Management, LLC (FAM) and Finvest Fund Management, LLC (FFM) with fraud in connection with two hedge funds that they managed and advised, Finvest Primer, L.P. (Primer Fund) and Finvest Yankee, L.P (Yankee Fund). The Commission's complaint alleges that, in an effort to attract and retain investors in Primer Fund and Yankee Fund, the defendants took elaborate steps to create the impression of profitable performance that they had not actually achieved.

Specifically, the Commission's complaint alleges that, beginning at least as early as mid-2006, defendants Grieve and FAM fabricated and disseminated financial information for the Primer Fund that was "certified" by two sham professional firms that Grieve himself created: a supposedly independent back-office administrator called Global Hedge Fund Services (GHFS); and a purportedly independent accounting firm called Kass Roland, LLC (Kass Roland). The complaint further alleges that Grieve and FAM sent certain investors a fabricated confirmation by GHFS of Primer Fund's trading operations for fiscal years 2001 through 2005, and sent at least one prospective investor financial statements containing a fake Kass Roland audit opinion. According to the complaint, Grieve had secretly formed GHFS and Kass Roland - each with fictitious employees, phone numbers, websites, email addresses, automated voice messaging systems, and physical office addresses - as part of an overall effort to deceive current and prospective investors about his investing capabilities and track record.

The Commission's complaint also alleges that Grieve, FAM, and FFM provided current and prospective investors in both Primer Fund and Yankee Fund with monthly account statements, newsletters, and "fact sheets" that materially overstated the funds' performance and assets. The complaint further alleges that, beginning in late 2008, Grieve has been engaging in similar misconduct overseas, including luring new investors and/or placating existing European investors with newly-fabricated documents.

The Commission's complaint charges all of the defendants with violations of 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 Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint seeks permanent injunctions, disgorgement and prejudgment interest thereon, and civil money penalties against all of the defendants.

The Commission's investigation in this matter continues. [SEC v. Grant Ivan Grieve, Finvest Asset Management, LLC; and Finvest Fund Management, LLC; Civil Action No. 09-Civ-1198 (S.D.N.Y.) (AKH)] (LR-20893)

INVESTMENT COMPANY ACT RELEASES

Allstate Financial Investment Trust, et al.

An order has been issued on an application filed by Allstate Financial Investment Trust and Allstate Institutional Advisors, LLC, 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 permits 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-28614 - February 9)

SELF-REGULATORY ORGANIZATIONS

Approval of Proposed Rule Changes

The Commission approved a proposed rule change submitted by the NASDAQ Stock Market (SR-NASDAQ-2008-097) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, adopting a limited exemption from OATS order data recordation requirements for registered options market makers. Publication is expected in the Federal Register during the week of February 9. (Rel. 34-59369)

The Commission approved a proposed rule change (SR NASDAQ-2008-101) submitted under Rule 19b-4 by the NASDAQ Stock Market to adopt a policy relating to its treatment of trade reports that it determines to be inconsistent with the prevailing market retroactive to Sept. 1, 2008. Publication is expected in the Federal Register during the week of February 9. (Rel. 34-59370)

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