RULES AND RELATED MATTERS
Adjustments to Civil Monetary Penalty Amounts
On Feb. 20, 2009, the Commission adopted a final rule adjusting the maximum amounts of the civil monetary penalties for the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and certain penalties under the Sarbanes-Oxley Act of 2002. This rule implements the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996, which requires the Commission, at least once every four years, to adopt a regulation adjusting for inflation the maximum amount of civil monetary penalties provided for in statutes administered by the Commission. The purpose of the inflationary adjustment is to maintain the level of deterrence effectuated by the civil monetary penalties and not to allow such deterrent effect to be diminished by inflation.
FOR FURTHER INFORMATION CONTACT: Richard A. Levine, Assistant General Counsel at (202) 551-5168 or James A. Cappoli, Office of the General Counsel at (202) 551-7923. (Rels. 33-9009; 34-59449; IA-2845; IC-28635)
In the Matter of Joseph Lovaglio
An Administrative Law Judge issued an Order Making Findings and Imposing Remedial Sanctions By Default that barred Joseph Lovaglio from association with any broker or dealer or investment adviser. On Dec. 5, 2008, the District Court for the Southern District of New York issued a final judgment that permanently enjoined Lovaglio from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. See SEC v. Rabinovich & Associates, No. 1:07-cv-10547-GEL (S.D.N.Y.). (Rel. 34-59436; IA-2844; File No. 3-13322)
In the Matter of Alan Brian Baiocchi
The Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Notice of Hearing (Order) against Alan Brian Baiocchi
In the Order Instituting Proceedings, the Division of Enforcement alleges that a criminal conviction was entered on Nov. 25, 2003, and affirmed by the Court of Appeals for the Ninth Circuit on July 13, 2007, in United States v. Baiocchi, Case No. 8:02-cr-00089 (Central District of California). The criminal conviction was based, among other things, on the fact that Baiocchi defrauded investors and obtained money and property by means of materially false and misleading statements in connection with the fraudulent offer and sale of securities in the form of fractional undivided interests in oil and gas drilling programs. A hearing will be convened to determine whether the allegations in the Order Instituting Proceedings are true, to provide Baiocchi an opportunity to dispute the allegations, and to determine whether any remedial sanction is appropriate and in the public interest.
The Order directs the Administrative Law Judge to issue an initial decision in this matter no later than 210 days from the date of service of the Order. (Rel. 34-59443; File No. 3-13380)
In the Matter of Kent D. Nelson
An Administrative Law Judge has issued an Initial Decision in Kent D. Nelson. The Initial Decision finds that Kent D. Nelson pleaded guilty to one count of mail fraud in violation of 18 U.S.C. § 1341 in the United States District Court for the District of New Mexico. The district court entered a judgment, sentencing Nelson to a prison term of thirty-six months, followed by three years of supervised probation, and ordering him to surrender his property interest in a condominium unit in Colorado and to pay a $175,000 penalty. The Initial Decision concludes that, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, it is in the public interest to bar Kent D. Nelson from association with any broker, dealer, or investment adviser. (Initial Decision No. 371; File No. 3-13112)
Commission Revokes Registration of Securities of Pacific Security Companies, Inc. for Failure to Make Required Periodic Filings
On February 25, the Commission revoked the registration of each class of registered securities of Pacific Security Companies, Inc. (Pacific Security) 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, Pacific Security 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 Pacific Security 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 Pacific Security's securities pursuant to Section 12(j) of the Exchange Act. This order settled the proceedings brought against Pacific Security in In the Matter of Pacific Industrial Corp., et al., Administrative Proceeding File No. 3-13292.
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 Pacific Industrial Corp, et al., Administrative Proceeding File No. 3-13292, Exchange Act Release No. 58964, Nov. 17, 2008. (Rel. 34-59444; File No. 3-13292)
Commission Issues Order Directing the Disbursement of $35 Million to the PBHG Funds
On February 25, the United Commission announced that it has issued an order directing the distribution of approximately $35 million to the PBHG Funds, in accordance with the Plan of Distribution developed and approved in connection with three related administrative actions alleging market timing in the PBHG Funds (Plan). See Pilgrim Baxter & Associates, Ltd., Admin. Proc. No. 3-11524; Gary L. Pilgrim, Admin. Proc. No. 3-11739; and Harold J. Baxter, Admin. Proc. No. 3-11740.
On June 30, 2006, the Commission published a Notice of Proposed Distribution Plan and Opportunity for Comment (Notice). The Notice advised that all persons who desired to comment on the proposed Distribution Plan could submit their views to the Commission no later than July 31, 2006. The Commission received comments and, on Nov. 22, 2006, the Commission approved the proposed Plan, as modified. See Exchange Act Release No. 54812 (Nov. 22, 2006).
Pursuant to the Plan, a Fair Fund consisting of approximately $267 million was disbursed to investors in a series of three disbursements: $125 million on April 12, 2007, $73 million on May 30, 2007, and $69 million on Aug. 24, 2007. See Exchange Act Rel. Nos. 55627 (Apr. 12, 2007); 55831 (May 30, 2007), and 56320 (Aug. 24, 2007), respectively. The Plan further provides that any monies not distributed directly to investors (the Residual), generally comprised of undeliverable, uncashed, returned, or declined payments, and interest accrued during the distribution, shall be distributed to the PBHG Funds based on the proportion of aggregate excess profits by market timers accounted for by each PBHG Fund. The Commission has now approved the distribution of the Residual in accordance with the Plan. (Rel. 34-59445; File No. 3-11524)
Final Judgments Entered Against Former Prudential Registered Representatives Michael L. Silver and Brian P. Corbett Concerning Deceptive Market Timing Practices
The Commission announced today that on February 24, the U.S. District Court for the Southern District of New York entered final judgments by consent against Michael L. Silver and Brian Corbett, two defendants in a civil injunctive action filed by the Commission in August 2006. The Commission's Complaint charged that Silver, 37, of Woodcliff, New Jersey, and Corbett, 36, of Baltimore, Maryland, were registered representatives associated with Prudential Securities, Inc., who defrauded mutual fund companies and the funds' shareholders in order to place in market timing trades at mutual funds that were trying to detect and block such trading. Without admitting or denying the allegations in the Commission's Complaint, Silver and Corbett consented to the entry of final judgments enjoining them from violating the antifraud provisions of the federal securities laws. The final judgment against Silver also orders him to pay a civil penalty of $175,000.
The Commission's Complaint alleged that, from at least January 2001 until September 2003, certain mutual fund companies tried to detect and block market timing activity. The Complaint alleged that Silver and Corbett defrauded mutual fund companies by hiding their and their hedge fund customers' identities through the use of multiple customer account numbers and broker identification numbers. The Complaint alleged that, among other deceptive practices, when mutual funds succeeded in identifying and attempted to block the defendants' trading activity under one customer account or broker identification number, the defendants often simply switched to a different customer account for the same customer or a different broker identification number and continued placing market timing trades.
The final judgments imposed permanent injunctions prohibiting Silver and Corbett from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Silver was also ordered to pay a civil monetary penalty of $175,000. The final judgment against Corbett does not impose a civil monetary penalty based on Corbett's sworn representations in his statement of financial condition and other information provided to the Commission. In related administrative proceedings to be instituted after entry of the permanent injunctions, Silver and Corbett will each be prohibited from association with a broker-dealer or investment adviser, with a right to reapply after three years.
The Commission's civil action remains pending against Frederick O'Meally and Jason Ginder. [SEC v. Frederick O'Meally, et. al., United States District Court for the Southern District of New York, Civil Action No. 1:06-cv-06483-LTS] (LR-20910)
SEC Emergency Action Halts Fraud at Unregistered Hedge Fund
The Securities and Exchange Commission today charged a Pearl River, N.Y., investment management firm and its principal for operating a large-scale scheme that defrauded hundreds of investors of millions of dollars by providing them with misleading marketing materials that significantly overstated investment returns and by misrepresenting the value of the assets under management.
The SEC is seeking a court order to freeze the assets of Westgate Capital Management, LLC and its managing member, James M. Nicholson. The SEC alleges that they solicited investors with false claims of an almost unbroken eight-year string of monthly investment successes. Neither the firm nor its principal is registered with the SEC. The U.S. Attorney's Office for the Southern District of New York today announced parallel criminal charges against Nicholson.
The SEC's complaint, filed in federal district court in Manhattan, alleges that since at least January 2008, Nicholson and Westgate defrauded current and prospective investors in 11 hedge funds they managed by misrepresenting the value of the hedge funds to investors, and soliciting new investors with sales materials that claimed a nearly impossible record of investment success. According to the SEC's complaint, at least one Westgate fund claimed positive returns in 98 of 99 consecutive months.
The SEC alleges Nicholson sought to further his fraud by creating a fictitious accounting firm and providing some of his investors with bogus audited financial statements. Nicholson apparently concocted this imposter firm under the name of an actual accountant while using his own telephone number and driver's license to set up a "virtual office."
According to the SEC's complaint, by late 2008, the funds had sustained such losses that Nicholson and Westgate could no longer honor redemption requests. They hid the losses from investors with misrepresentations and false sales brochures. Nicholson further attempted to hide losses in the Westgate fund family by other devices. He closed one fund that was heavily invested in the bankrupt Lehman Brothers and folded its assets into another Westgate fund. He issued bad checks to some investors seeking to cash out, and ultimately suspended all investor redemptions due to what he called investors' "irrational behavior."
The SEC alleges that Westgate and Nicholson have violated the antifraud provisions of the federal securities laws. The SEC is seeking an emergency court order freezing the assets of Nicholson, Westgate, and the hedge funds; preventing the destruction of documents; granting expedited discovery; and requiring Nicholson and Westgate to provide accountings. Additionally, the SEC seeks preliminary and permanent injunctions, disgorgement, and financial penalties against both defendants.
Nicholson was barred from the brokerage industry in 2001 for failing to reply or supplying false information in response to inquiries from the National Association of Securities Dealers (now known as the Financial Industry Regulatory Authority).
The SEC appreciates the assistance of the U.S. Attorney for the Southern District of New York and the Rockland County, N.Y., District Attorney in this matter. [SEC v. James M. Nicholson and Westgate Capital Management, LLC, Defendants, and Westgate Absolute Return Fund, LP, et al., Relief Defendants, Civil Action No. 09-civ-1748 (RMB) (S.D.N.Y.)] (LR-20911)
Immediate Effectiveness of Proposed Rule Change
A proposed rule change filed by the Financial Industry Regulatory Authority to update rule cross-references and make other various non-substantive technical changes to FINRA rules (SR-FINRA-2009-005) has become immediately 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 February 23. (Rel. 34-59432)
Proposed Rule Change
The Chicago Board Options Exchange filed a proposed rule change (SR-CBOE-2009-007) relating to tied hedge transactions. Publication is expected in the Federal Register during the week of February 23. (Rel. 34-59435)
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