In the Matter of Cornerstone Capital Management, Inc. and Laura Jean Kent
On March 20, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (Order) against Cornerstone Capital Management, Inc. (Cornerstone Capital), a registered investment adviser, and its sole principal, Laura Jean Kent (Kent), 59, of Redwood City, California.
In the Order, the Commission finds that from 2003 through 2007 Cornerstone and Kent, despite knowing that the value of certain illiquid securities (also referred to as alternative private investments) in which they had invested approximately $15 million of their clients' funds were severely impaired, continued to assure their clients that the investments retained their full value. Even after the principals behind some of those investments were convicted of criminal fraud, Kent continued to charge an assets-under-management fee based on the original cost of the failed investments, collecting $335,758 in inflated fees from her clients.
Based on the foregoing, the Order finds that Cornerstone and Kent willfully violated Sections 206(1) and 206(2) of the Advisers Act, which make it unlawful to employ any device, scheme, or artifice to defraud any client or prospective client; and to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.
The Order censures Cornerstone and Kent, and requires them to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act. The Order also requires Cornerstone and Kent to disgorge improper management fees of $335,758 and prejudgment interest of $80,000, for a total of $415,758, but waives payment of such amount except for $335,758 and declines to impose a penalty based on Cornerstone's and Kent's sworn representations concerning their financial condition. The Order directs Cornerstone and Kent to pay their disgorgement quarterly over a three-year period, and also requires Respondents to develop a plan to distribute the disgorgement ordered.
In addition, the Order requires Cornerstone and Kent to comply with undertakings to retain an independent consultant to value all of Cornerstone's alternative private investments, if any, for a three-year period. Cornerstone and Kent agreed to the issuance of the Order without admitting or denying its factual findings. (Rel. IA-2855; File No. 3-13199)
In the Matter of in Janex International, Inc.
An Administrative Law Judge issued an Order Making Findings and Revoking Registrations by Default (Default Order) in Janex International, Inc. The Default Order finds that each of the six Respondents failed to comply with Section 13(a) of the Securities Exchange Act of 1934 and Exchange Act Rules 13a-1 and 13a-13 or 13a-16 thereunder by failing to file required periodic reports over a number of years. Based on these findings, the Default Order revokes the registration of each class of registered securities of Janex International, Inc., Jet Energy Corp., JobSort, Inc., Jones Plumbing Systems, Inc., Jore Corp., and Journey's End Resorts, Inc. (Rel. 34-59619; File No. 3-13375)
Sharlene Abrams, Former Chief Financial Officer of Mercury Interactive, LLC, to be Permanently Enjoined and to Pay Civil Penalties and Disgorgement for Stock Option Backdating and Other Fraudulent Conduct; Abrams Also to be Barred from Serving as an Officer and Director of a Public Company
The Securities and Exchange Commission today settled civil fraud charges against Sharlene Abrams, a former Chief Financial Officer of Mercury Interactive, LLC, arising from an alleged scheme to backdate stock option grants and from other alleged misconduct.
On May 31, 2007, the Commission charged Abrams and three other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint alleges that during this period certain of these executives, including Abrams, backdated stock option exercises, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.
Without admitting or denying the allegations in the Commission's complaint, Abrams consented to the entry of a final judgment permanently enjoining her from violating and/or aiding and abetting violations of the antifraud, financial reporting, record-keeping, internal controls, false statements to auditors, securities ownership reporting and proxy provisions of the federal securities laws, and barring her from serving as an officer or director of a public company. Abrams will pay $2,287,914 in disgorgement, of which $1,498,822 represents the "in-the-money" benefit from her exercise of backdated option grants, and a $425,000 civil penalty. Under the terms of the settlement, Abrams' disgorgement of her "in-the-money" benefit--$1,498,822--would be deemed satisfied by her previous voluntary payment of that amount to Mercury. The settlement is subject to the approval of the United States District Court for the Northern District of California.
As part of the settlement, and following the entry of the proposed final judgment, Abrams, without admitting or denying the Commission's findings, has consented to the entry of Commission order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending her from appearing or practicing before the Commission as an accountant.
The Commission previously filed settled charges in this matter against Mercury and three former outside directors of Mercury. On May 31, 2007, the Commission filed civil fraud charges against Mercury based on the stock option backdating scheme and other fraudulent conduct noted above. 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. See Litigation Release No. 20136 (May 31, 2007). On September 17, 2008, the Commission filed settled charges against three former outside directors of Mercury alleging that they 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. The outside directors settled the matter by consenting to permanent injunctions and the payment by each director of a $100,000 penalty. See Litigation Release No. 20724 (Sept. 17, 2008). Mercury and the outside directors settled the charges without admitting or denying the allegations in the Commission's complaint.
The Commission's litigation against the other senior Mercury officers is continuing. [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-20964; AAE Rel. 2953)
SEC Charges Escala Group, Inc., its Former CEO and CFO with Disclosure and Accounting Fraud Concerning Related Party Transactions with Parent Company Afinsa
Escala Enters Into a Proposed Simultaneous Settlement
The Securities and Exchange Commission today filed a disclosure and accounting fraud case against then-NASDAQ National Market issuer Escala Group, Inc.; its founder and former CEO Gregory Manning, 62; and its former CFO Larry Lee Crawford, 60, alleging fraudulent related party transactions between Escala and its parent company, Afinsa Bienes Tangibles, S.A. (Afinsa). Escala is a network of companies in the collectibles market specializing in stamps, among other things. Afinsa was a privately held Spanish company that sold investments in portfolios of stamps in Europe.
The SEC complaint alleges a fraudulent business scheme based upon the secret and dramatic manipulation of collectible stamp values, in which Escala, Manning, and Crawford violated the antifraud and reporting provisions of the federal securities laws by:
The complaint alleges that Escala and Manning also violated the antifraud provisions by selling back to Afinsa in a round-trip transaction inventory acquired from Afinsa in direct contravention of Escala's public promise not to do so.
The complaint charges Escala with violations of Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. SS 78j(b), 78m(a), 78m(b)(2)(A) and (B)] and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13, [17 C.F.R. SS 240.10b-5, 240.12b-20, 13a-1 and 13a-13]. Simultaneous with the filing of the complaint in a Consent and proposed Final Judgment submitted for the Court's consideration, without admitting or denying the allegations in the complaint, Escala consented to a permanent injunction against future violations of these provisions.
The complaint charges defendants Manning and Crawford with violations of Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. SS 78j(b) and 78m(b)(5)] and Exchange Act Rules 10b-5, 13b2-1, 13b2-2, and 13a-14, [17 C.F.R. SS 240.10b-5, 240.13b2-1, 240.13b2-2 and 240.13a-14], aiding and abetting Escala's violations of Sections 13(a), and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13, and seeks permanent injunctions against future violations, disgorgement of ill-gotten gains, prejudgment interest, civil penalties, and officer and director bars.
The Commission acknowledges the assistance of the Special Prosecutions Office for Financial Offenses relating to Corruption, Madrid, Spain.
The Commission's investigation in this matter is ongoing as to the role of others. [SEC v. Escala Group, Inc., Gregory Manning, and Larry Lee Crawford, CPA, Civil Action No. 09 CV 2646 (DLC) (S.D.N.Y.)] (LR-20965)
Court Enters Final Judgment Setting Disgorgement, Prejudgment Interest and a Civil Penalty Against Anthony A. James
The Securities and Exchange Commission announced that on March 23, 2009, the Honorable Cecilia M. Altonaga, United States District Judge for the Southern District of Florida, entered a final judgment ordering Anthony A. James to pay $2,390,487.45 in disgorgement, plus prejudgment interest of $84,620.10 and a $130,000 civil penalty in connection with his scheme to misappropriate client funds and operate a Ponzi scheme.
James had previously consented to a judgment of permanent injunction and other relief in connection with the scheme enjoining him from future violations of 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 Court entered the injunction on September 25, 2008.
The Commission's complaint against James and his investment advisory firm, James Asset Advisory LLC (James Asset) alleged that from at least April 2001 through January 2008, James and James Asset received at least $5.2 million from 44 clients whom they misled into believing their funds would be invested in stocks, bonds, and mutual funds. However, the Defendants never invested any client funds. Instead, the complaint alleged, James misappropriated almost $2.4 million to fund personal expenses, including the purchase of a six-bedroom, 5,000 square foot home, a luxury condominium, a Porsche sports car, and season tickets to the Miami Heat games. James is under criminal indictment in the Eastern District of Michigan for the same conduct.
On Feb. 26, 2009, the Commission dismissed, with prejudice, its claims for disgorgement, prejudgment interest and a civil penalty against James Asset because the company is defunct and had no assets from which a judgment could be collected. [SEC v. Anthony A. James and James Asset Advisory, L.L.C., Case No. 08-61516-CIV-Altonaga/Brown (S.D. Fla.)](LR-20966)
Criminal Charges Filed Against Two Individuals Related to $40 Million Ponzi Scheme
The Department of Justice announced on March 20, 2009, that it filed criminal charges against Anthony Vassallo, 29, of Folsom, California in the United States District Court for the Eastern District of California. The Department of Justice charged Vassallo with conspiracy, mail fraud, wire fraud, money laundering, and securities law violations for his role in an investment fraud. According to the criminal complaint, Vassallo took in $40 million from 150 investors to operate a hedge fund investment program as a massive Ponzi scheme. Vassallo is alleged to have deceived investors about their rates of return, fabricated performance reports, and used investor funds for unauthorized purposes, including to make purported "dividend" payments to other investors.
The Securities and Exchange Commission earlier filed a civil injunctive action against Vassallo, Kenneth Kenitzer, 66, of Pleasanton, California, and their company Equity Investment Management and Trading, Inc. (EIMT). In its complaint, filed in federal court in Sacramento on March 11, 2009, the SEC alleged that Vassallo, Kenitzer, and EIMT violated the anti-fraud provisions of the federal securities laws by orchestrating the multi-million dollar investment fraud. The SEC obtained emergency orders freezing Vassallo's and EIMT's assets, including $1.2 million in a bank account controlled by Vassallo. In its continuing case, the SEC seeks permanent injunctive relief, disgorgement of defendants' ill-gotten gains, and financial penalties.
The Department of Justice also announced that on March 18, 2009, it filed charges against another individual, Michael David Sanders, a.k.a. David Dennis Sanders, 41, of Fair Oaks, California. Sanders was charged with conspiracy, impersonating a federal law enforcement agent, and attempting to extort monies in connection with recovering funds for EIMT. According to the criminal complaint, Sanders and others with him falsely posed as agents of the SEC, FBI, and Attorney General while displaying guns and threatening individuals with arrests if they did not wire funds to a specified bank account.
In other recent instances, individuals have attempted to obtain confidential information from investors, broker-dealers, and investment advisers by falsely identifying themselves as SEC employees. The SEC warns investors about con-artists who may impersonate SEC officials or use the names of actual SEC employees to mislead potential victims. If someone unfamiliar to you claims to be from the SEC, verify their identity by asking for their name, the SEC office in which they work, and their telephone number. Then call the SEC's personnel locator at 202-551-6000 and ask to speak directly to that SEC staff member. If you cannot verify the person's identity, please report it to the SEC by calling 800-732-0330 or e-mailing: firstname.lastname@example.org. [SEC v. Anthony Vassallo, Kenneth Kenitzer, and Equity Investment Management and Trading, Inc., Case No. 2:09-CV-00665-LKK-DAD (E.D. Cal.)] (LR-20967)
INVESTMENT COMPANY ACT RELEASES
UBS AG, et al.
The Commission has issued a temporary order to UBS AG, et al. under Section 9(c) of the Investment Company Act with respect to an injunction issued by the U.S. District Court for the District of Columbia on March 19, 2009. The temporary order exempts applicants and companies of which UBS AG is or becomes an affiliated person from the provisions of Section 9(a) until the Commission takes final action on an application for a permanent order. The Commission also has issued a notice giving interested persons until April 13, 2009, to request a hearing on the application filed by applicants for a permanent order under Section 9(c) of the Act. (Rel. IC-28652 - March 19)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change (SR-FINRA-2008-055) submitted pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-5 thereunder by the Financial Industry Regulatory Authority to Adopt FINRA Rule 2114 (Recommendations to Customers in OTC Equity Securities) in the Consolidated FINRA Rulebook. Publication is expected in the Federal Register during the week of March 23. (Rel. 34-59605)
The Commission approved a proposed rule change submitted by the New York Stock Exchange (SR-NYSE-2009-04) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 establishing fees for NYSE Trades. Publication is expected in the Federal Register during the week of March 23. (Rel. 34-59606)
Immediate Effectiveness of Proposed Rule Changes
National Securities Clearing Corporation filed a proposed rule change (SR-NSCC-2009-02) under Section 19(b)(3)(A) of the Securities Exchange Act to change the calculation of NSCC's tiered trade netting fee from being computed on the basis of daily average volume to a monthly volume basis. The proposed rule change has become immediately effective. Publication is expected in the Federal Register during the week of March 23. (Rel. 34-59607)
A proposed rule change filed by the NASDAQ Stock Market (SR-NASDAQ-2009-023) relating to trading the two character ticker symbol "UG" 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 March 23. (Rel. 34-59610)
Proposed Rule Changes
The Chicago Board Options Exchange filed a proposed rule change (SR-CBOE-2009-018) relating to Short Term Option Series. Publication is expected in the Federal Register during the week of March 23. (Rel. 34-59601)
The New York Stock Exchange filed a proposed rule change (SR-NYSE-2009-31) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder to Establish an Initial Listing Fee and an Annual Listing Fee for Securities Listed Under Section 102.03 and Traded on the NYSE Bonds System. Publication is expected in the Federal Register during the week of March 23. (Rel. 34-59608)
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