SEC News Digest

ENFORCEMENT PROCEEDINGS

Three Defendants in Wall Street Insider Trading Ring Settle SEC Charges

The Securities and Exchange Commission announced today that on Sept. 29, 2009, the Honorable P. Kevin Castel, United States District Judge for the Southern District of New York, entered final judgments against defendants Erik R. Franklin, Q Capital Investment Partners, LP (Q Capital), and David M. Tavdy, in SEC v. Guttenberg, et al., C.A. No. 07 CV 1774 (S.D.N.Y.), an insider trading case the Commission filed on March 1, 2007. The Commission's complaint alleged illegal insider trading in connection with two related schemes in which Wall Street professionals serially traded on material, nonpublic information tipped by insiders at UBS Securities LLC (UBS) and Morgan Stanley & Co., Inc. (Morgan Stanley), in exchange for cash kickbacks.

The Commission's complaint alleged that from 2001 through 2006, Mitchel S. Guttenberg, an executive director in the equity research department of UBS, illegally tipped material, nonpublic information concerning upcoming UBS analyst upgrades and downgrades to two Wall Street traders, Franklin and Tavdy, in exchange for sharing in the illicit profits from their trading on that information. The complaint also alleged that Franklin was a downstream tippee in another scheme in which, in 2005 and 2006, Randi Collotta, an attorney who worked in the global compliance department of Morgan Stanley, illegally tipped material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley's investment banking clients.

The complaint alleged that Franklin illegally traded on the inside information for two hedge funds he managed, Lyford Cay Capital, LP and Q Capital, and in his personal accounts. Tavdy illegally traded on the inside information (i) for Andover Brokerage, LLC and Assent LLC, registered broker-dealers where Tavdy was a proprietary trader, (ii) in his own personal account, (iii) in the accounts of a relative and friend, and (iv) in the accounts of Jasper Capital LLC, a day-trading firm with which Tavdy was associated. Franklin and Tavdy also had downstream tippees who traded on the inside information. Without admitting or denying the allegations in the complaint, Franklin, Q Capital, and Tavdy settled the Commission's insider trading charges.

Franklin and Q Capital consented to the entry of a final judgment which (i) permanently enjoins them from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (Securities Act); and (ii) orders, on a joint and several liability basis, disgorgement of $5,400,000, with all but $290,000 waived based on a demonstrated inability to pay. In a related administrative proceeding, 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 (Advisers Act) against Franklin. The order finds that Franklin was enjoined from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act and, in a parallel criminal case, pled guilty to charges of securities fraud and conspiracy to commit securities fraud. U.S. v. Erik Franklin, No. 1:07-CR-164 (S.D.N.Y.). Franklin consented to the entry of a Commission order barring him from future association with any broker, dealer, or investment adviser without admitting or denying the findings in the order except as to entry of the injunction and his guilty plea.

Tavdy consented to the entry of a final judgment which (i) permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act; and (ii) orders him to pay disgorgement of $10,300,000. In a related administrative proceeding, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 against Tavdy. The order finds that Tavdy was enjoined from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act and, in a parallel criminal case, pled guilty to charges of securities fraud and conspiracy to commit securities fraud. U.S. v. Mitchel Guttenberg and David Tavdy, No. 1:07-CR-141 (S.D.N.Y.). Tavdy consented to the entry of a Commission order barring him from future association with any broker or dealer without admitting or denying the findings in the order except as to entry of the injunction and his guilty plea.

The Commission also announced that Samuel W. Childs, Jr., a former general securities principal at Assent LLC, consented to a Commission Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 barring him from future association with any broker or dealer. The Order finds that Childs pled guilty to the charge of conspiracy to commit securities fraud, wire fraud and commercial bribery. U.S. v. Samuel W. Childs, Jr. and Laurence McKeever, No. 1:07-CR-142 (S.D.N.Y.). In that case, criminal indictment alleged that Childs accepted bribes from traders at Assent LLC in exchange for not reporting their illegal trading to Assent management. Childs consented to the Order without admitting or denying the findings in the order except as to his guilty plea.

The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation. [SEC v. Mitchel S. Guttenberg, Erik R. Franklin, David M. Tavdy, Mark E. Lenowitz, Robert D. Babcock, Andrew A. Srebnik, Ken Okada, David A. Glass, Marc R. Jurman, Randi E. Collotta, Christopher K. Collotta, Q Capital Investment Partners, LP, DSJ International Resources Ltd. (d/b/a Chelsey Capital), and Jasper Capital LLC, C.A. No. 07 CV 1774 (S.D.N.Y) (PKC)] (LR-21244); (Rel.34-60804; File No. 3-13643)

In the Matter of Tony E. Morrison

On October 8, 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 Tony E. Morrison. The Order finds that on Sept. 17, 2009, a final judgment was entered by consent against Morrison, permanently enjoining him from future violations of 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, in the civil action styled SEC v. Texas Securities Partners, LLC and Tony E. Morrison, Civil Action Number 4:09-cv-00467, in the United States District Court for the Eastern District of Texas. The Commission's complaint in that action alleged that Morrison directed TSP registered representatives to misrepresent the true nature of the oil and gas offerings to prospective investors, which included material misrepresentations and omitting material facts regarding past performance, expected returns, and risk. The complaint further alleged that as a result of Morrison's actions, Texas Securities Partners raised $12.7 million by selling fractional interests in 4 oil and gas offerings to over 500 investors nationwide.

Based on the above, the Order bars Morrison from associating with any broker or dealer. Morrison consented to the issuance of the Order without admitting or denying any of the findings except as to the entry of the final judgment. (Rel. 34-60805; File No. 3-13644)

In the Matter of Peter Y. Atkinson, Esq.

On October 9, the Commission issued an Order Instituting Public Administrative and Cease-and-Desist and Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Peter Y. Atkinson (Atkinson).

The Order finds, among other things, that Atkinson was a former Executive Vice President and a Director of Hollinger International, Inc., now known as the Sun-Times Media Group, Inc. (Hollinger International), and the former General Counsel of Hollinger International's then-controlling corporate shareholder, Hollinger Inc. Atkinson received a total of $152,000 in purported non-competition payments in connection with Hollinger International's sales of certain newspapers to Forum Communications Company and PMG Acquisition Corporation and from American Publishing Company, a Hollinger International subsidiary. Atkinson did not present these purported non-competition payments to Hollinger International's Audit Committee or Board of Directors for review or approval and failed to disclose his receipt of these payments in his responses to the questionnaires used by Hollinger International to prepare its proxy statements and annual reports. Hollinger International's and Hollinger Inc.'s disclosures regarding these purported non-competition payments in certain proxy statements and annual reports filed with the Commission were materially false and misleading. Atkinson participated in preparing these proxy statements and annual reports and reviewed and approved the relevant disclosures contained in these filings.

The Order further finds that, in 2007, Atkinson was convicted of three counts of mail fraud in connection with these purported non-competition payments and was sentenced to 24 months imprisonment, ordered to pay a fine of $3,000, and held jointly and severally liable for forfeiture of $6.1 million.

Based on the above, the Order: (1) requires Atkinson to cease and desist from committing or causing violations and any future violations of Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act and Rules 10b-5, 13b2-1, 14a-3 and 14a-9 thereunder and from causing violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13a-16 thereunder; (2) prohibits him from acting as an officer or director of a public company; and (3) denies him the privilege of appearing or practicing before the Commission as an attorney. Atkinson consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. 34-60806; AAE Rel. 3057; File No. 3-13645)

Hedge Fund Manager Greg Bell, Previously Sued by SEC for Fraud, Pleads Guilty to Wire Fraud

The Securities and Exchange Commission announced that on Oct. 7, 2009, the Honorable Judge Paul Magnuson of the United States District Court for the District of Minnesota accepted a guilty plea by former Chicago-area hedge fund manager Gregory Bell to one count of wire fraud. Sentencing on this charge, which carries a maximum penalty of 20 years and a fine of $250,000, will be held on a later date. The U.S. Attorney's Office for the District of Minneapolis had filed criminal charges against Bell on July 10, 2009.

Bell is one of the defendants in a pending civil injunctive action filed by the Commission on July 8, 2009, in the United States District Court for the District of Minnesota. The Commission's Complaint charges another defendant, Minnesota businessman Thomas Petters, with fraud for perpetrating a massive Ponzi scheme from 1995 to September 2008 through the sale of notes related to consumer electronics. In 2001 Bell formed an investment company Lancelot Investment Management, LLC, also a defendant in the Commission's lawsuit. From 2002 to 2008 Bell and his investment company raised over $2.62 billion from hundreds of investors through the sale of interests in hedge funds they managed. The Commission's Complaint alleges that Bell in turn invested almost all of these assets in notes sold by Petters, falsely assuring investors that he was taking steps to protect their money and to verify the underlying transactions. The Complaint alleges that when Petters's scheme began to unravel, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes. Bell and Lancelot Management also withdrew more than $40 million in fees from the hedge funds during the final months before Petters's scheme collapsed. On July 24, 2009, the Court entered a Preliminary Injunction that, among other things, froze all assets of Lancelot Management, Bell and Bell's wife, who is a relief defendant, and required an accounting of their assets and liabilities including all funds and assets received from Petters's notes and/or the hedge funds.

On Oct. 9, 2009, the Commission's action was stayed pending the conclusion of Bell's sentencing and the outcome of the trial in the U.S. Attorney's criminal suit against Thomas Petters. That trial is scheduled to begin Oct. 26, 2009. [U.S. v. Gregory Bell, Case No. 09-cr-00269 (D. Minn.); SEC v. Thomas J. Petters, Case No. 09-cv-1750 (D. Minn.)] (LR-21245)

SEC Resolves Charges Against Remaining Defendants In Related Insider Trading Cases

The Securities and Exchange Commission today announced that it has obtained final judgments against Gary M. Gosson, Gary L. Camp, Alan J. Johnston, James L. Jerome and Brandt A. England, the remaining defendants in two related district court cases. The Commission originally charged sixteen individuals with insider trading in advance of Dick's Sporting Goods Inc.'s June 21, 2004 announcement that it intended to acquire Galyan's Trading Company, Inc. via a tender offer.

The complaints, which the SEC filed in the Western District of Pennsylvania on Sept. 30, 2008, alleged:

• Joseph J. Queri, Jr., who was the Senior Vice President of Real Estate for Dick's, tipped his close friend, Gosson, and his father, Joseph Queri, Sr., about the acquisition.
  
• Gosson, a resident of Syracuse, New York, tipped nine friends, including Camp and Johnston, who all bought shares of Galyan's stock. Gosson traded through Camp's brokerage account and received trading profits from two other friends, thereby profiting $47,127.00. Camp traded and profited $128,792.00. Johnston traded and profited $26,503.48. He also tipped five family members and friends who bought Galyan's stock and profited a total of $45,741.41.
  
• Queri, Sr., a resident of Las Vegas, Nevada, tipped six friends, including Jerome. Jerome traded and profited $46,246.00. He also tipped his friend, England, who bought Galyan's stock and profited $51,158.00.

The day after the public announcement, Galyan's stock closed at $16.68, a 50.3% increase from the previous day's closing price of $11.10. The trading connected to Queri, Jr.'s tips resulted in over $600,000 in illegal trading profits.

On Aug. 10, the Honorable Arthur J. Schwab, U.S. District Court Judge, entered a Final Judgment by Default against Gosson and a Final Judgment against Gary L. Camp, a resident of Manlius, New York. The Final Judgments permanently enjoin Gosson and Camp from future violations of the antifraud provisions of the securities laws, Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 14e-3 thereunder. Gosson was also ordered to pay disgorgement of $47,127.00, plus prejudgment interest of $17,174.26, and a civil penalty in the amount of $274,613.00 for trading and tipping nine friends. Camp was ordered to pay disgorgement of $128,792.00, plus prejudgment interest of $46,935.00, and a one-time civil penalty in the amount of $128,792.00 for his trading. Camp consented to the entry of the Final Judgment without admitting or denying the allegations in the complaint.

On Oct. 5, Judge Schwab entered Final Judgments against Johnston, a resident of Syracuse, New York, and James L. Jerome and Brandt A. England, residents of Las Vegas, Nevada. Without admitting or denying the allegations in the complaint, Johnston, Jerome and England consented to the entry of Final Judgments in which they are permanently enjoined from future violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder. Johnston also agreed to pay disgorgement of $26,503.48, plus prejudgment interest of $9,241.74, a civil penalty in the amount of $49,374.19 for trading and tipping five family members and friends. The Final Judgment did not order him to pay an additional $22,870.70 civil penalty based on his financial condition. Jerome agreed to pay disgorgement of $46,246.00, plus prejudgment interest of $16,853.20, and a civil penalty in the amount of $46,246.00 for trading and tipping England. The Final Judgment did not order him to pay an additional $51,158.00 civil penalty based on his financial condition. England agreed to pay disgorgement of $51,158.00, plus prejudgment interest of $18,643.25, and a one-time civil penalty in the amount of $51,158.00 for his trading.

In a related criminal action, on Aug. 5, Queri Jr., Gosson and Camp were indicted by the U.S. Attorney's Office for the Northern District of New York on, among other things, criminal charges of insider trading in connection with Dick's acquisition of Galyan's.

The Commission acknowledges the assistance and cooperation of the Financial Industry Regulatory Authority.

For additional information, please see Litigation Release Nos. 20765 (Oct. 1, 2008), 20895 (Feb. 10, 2009) and 21008 (April 21, 2009). [SEC v. Joseph J. Queri, Jr., Gary M. Gosson, et al., Case No. 2:08-cv-01361-AJS (W.D. Penn.); Joseph J. Queri, Jr., Joseph J. Queri, Sr., et al., Case No. 2:08-cv-01367-AJS (W.D. Penn.)] (LR-21246)

INVESTMENT COMPANY ACT RELEASES

Grail Advisors, LLC and Grail Advisors ETF Trust

An order has been issued on an application filed by Grail Advisors, LLC and Grail Advisors ETF Trust exempting applicants from Section 15(a) of the Investment Company Act and Rule 18f-2 under the Act. The order permits the applicants, including an actively-managed exchange traded open-end fund, to enter into and materially amend subadvisory agreements without shareholder approval and grants relief from certain disclosure requirements. (Rel. IC-28944 - October 8)

SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by NYSE Amex to amend its schedule of transaction fees and rebates (SR-NYSEAmex-2009-66) has become 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 October 12. (Rel. 34-60800)

A proposed rule change (SR-ISE-2009-70) filed by the International Securities Exchange relating to payment for order flow fees has become 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 October 12. (Rel. 34-60801)

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