U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

SEC News Digest

Issue 2009-212
November 4, 2009

COMMISSION ANNOUNCEMENTS

Securities and Exchange Commission Suspends Trading in the Securities of Minecore International, Inc. for Failure to Make Required Periodic Filings

The Securities and Exchange Commission announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the Exchange Act), of trading in the securities of Minecore International, Inc. (Minecore), of San Jose, California at 9:30 a.m. EST on Nov. 4, 2009, and terminating at 11:59 p.m. EST on Nov. 17, 2009.

The Commission temporarily suspended trading in the securities of Minecore because of questions that have been raised about the lack of current and accurate information concerning the securities of Minecore because it has not filed a periodic report since its Form 10-KSB for the fiscal year ending Dec. 31, 2001, filed on June 30, 2004.

The Commission cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.

Further, brokers and dealers should be alert to the fact that, pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of the rule. If any broker or dealer has any questions as to whether or not he has complied with the rule, he should not enter any quotation but immediately contact the staff in the Division of Market Regulation, Office of Interpretation and Guidance, at (202) 551-5760. If any broker or dealer is uncertain as to what is required by Rule 15c2-11, he should refrain from entering quotations relating to Minecore's securities until such time as he has familiarized himself with the rule and is certain that all of its provisions have been met. If any broker or dealer enters any quotation which is in violation of the rule, the Commission will consider the need for prompt enforcement action.

If any broker dealer or other person has any information which may relate to this matter, they should immediately contact Teresa J. Verges, Assistant Regional Director, Miami Regional Office of the Securities and Exchange Commission at (305) 982-6384. (Rel. 34-60925)


Norm Champ Named Associate Regional Director for Examinations in SEC New York Regional Office

On Nov. 3, 2009, the Securities and Exchange Commission announced the selection of Norm Champ as Associate Regional Director for Examinations in the agency's New York Regional Office (NYRO).

In his new position, Mr. Champ will direct a staff of approximately 100 accountants and examiners responsible for the inspections of investment advisers and investment companies within the New York Region. He will assume his new post in January.

"Norm brings to our inspection program an unusual diversity of experience - as general counsel of a multi-billion dollar hedge fund complex, as a university lecturer, and as a policy thinker," said George S. Canellos, Director of the SEC's New York Regional Office. "He is ideally suited to build on the great work of his predecessor, Tom Biolsi, and also bring his own vision to the examination program. I believe Norm will be an outstanding addition to the NYRO leadership team."

John Walsh, Acting Director of the SEC's Office of Compliance Inspections and Examinations, added, "Norm brings terrific industry knowledge to the job of overseeing compliance examinations of investment advisers and investment companies in a challenging time. He is an excellent addition to NYRO's dedicated examination staff, and I'm very pleased to welcome him to the SEC."

Mr. Champ said, "The examination staff in the NYRO has a wealth of knowledge and experience. I look forward to working with the staff to administer examinations of registered investment advisers and investment companies. The mission of educating registrants and finding any fraud is vital to the proper functioning of the U.S. securities markets and the confidence of investors."

For the past 10 years, Mr. Champ has served as General Counsel of Chilton Investment Company, a multi-national investment adviser and hedge fund manager. Since 2005, Mr. Champ also has served as a member of Chilton's Executive Committee. Mr. Champ is a member of the Board of Directors of the Managed Funds Association, a trade association of the hedge fund industry and a position he will be resigning to join the SEC. A lecturer on law who teaches Private Funds Investment Management Law at Harvard Law School, Mr. Champ was a lawyer at the firm of Davis Polk & Wardwell prior to joining Chilton.

Mr. Champ received his bachelor's degree from Princeton University, summa cum laude, in 1985, a master's degree from King's College University of London in 1986 where he was a Fulbright Scholar, and a juris doctor degree from Harvard Law School, cum laude, in 1989. (Press Rel. 2009-231)


ENFORCEMENT PROCEEDINGS

In the Matter of Minecore International, Inc.

The Securities and Exchange Commission today announced the institution of an administrative proceeding against Minecore International, Inc. (Minecore) pursuant to Section 12(j) of the Securities Exchange Act of 1934 (Exchange Act). Minecore is a Delaware corporation headquartered in San Jose, California. The purpose of the proceeding is to determine whether the registration of each class of Minecore's securities should be suspended for a period not exceeding twelve months or revoked. The Division of Enforcement (Division) alleges that Minecore failed to comply with Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13, by not filing any periodic reports since June 30, 2004 when it filed a Form 10-KSB for the fiscal year ending Dec. 31, 2001.

A hearing will be scheduled before an Administrative Law Judge to take evidence on the Division's allegations, to afford Minecore the opportunity to establish defenses to the allegations, and to determine whether the registration of each class of Minecore's securities should be suspended for a period not exceeding twelve months or revoked.

The Commission ordered that the Administrative Law Judge in these proceedings issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-60926; File No. 3-13672)


In the Matter of J.P. Morgan Securities Inc.

On Nov. 4, 2009, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 (Securities Act), and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Exchange Act), Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against J.P. Morgan Securities, Inc. The Order finds that J.P. Morgan Securities violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board (MSRB) Rule G-17, in connection with an unlawful payment scheme which allowed them to obtain $5 billion in Jefferson County, Alabama municipal bond offerings and swap agreement transactions.

The Order finds that between October 2002 and November 2003, J.P. Morgan Securities, through its former managing directors Charles LeCroy and Douglas MacFaddin, made over $8 million in payments to close friends of Jefferson County commissioners who either owned or worked at local broker-dealers. These broker-dealers had no official role and performed few, if any, services on the transactions. In connection with these payments, the County commissioners voted to select J.P. Morgan Securities as managing underwriter and its affiliated bank as swap provider for the largest municipal auction rate securities and swap agreement transactions in the firm's history.

The Order further finds that J.P. Morgan Securities failed to disclose any of these payments, and the inherent conflicts of interest raised by the payments, either to the County or investors in bond offerings, or to the County in the swap agreements at issue. This conduct deprived Jefferson County and its investors of objective and impartial bond underwriting processes and swap agreement negotiations. Moreover, J.P. Morgan Securities incorporated the costs of these unlawful payments by charging Jefferson County higher interest rates on the swap transactions.

Based on the above, the Order censures J.P. Morgan Securities, requires it to cease and desist from committing or causing any violation or any future violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rule G-17, and further orders J.P. Morgan Securities to pay a $25 million civil penalty. J.P. Morgan Securities consented to the Order without admitting or denying any of findings except subject matter and personal jurisdiction. In accepting J.P. Morgan's offer of settlement, the SEC considered J.P. Morgan's undertakings to: (1) make a $50 million payment to and for the benefit of Jefferson County; and (2) to terminate any and all obligations of Jefferson County to make over $647 million in payments its affiliated bank claimed the County owed under the swap agreements. (Rels. 33-9078; 34-60928; 33-9079; 33-9080; 34-60929; File No. 3-13673)


In the Matter of James E. Otto

On Nov. 4, 2009, 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 Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 (Order) against James E. Otto.

The Division of Enforcement (Division) alleges in the Order that Otto, an insurance salesman in Kansas and Missouri, violated the broker-dealer registration provisions of the Exchange Act by acquiring trading authority on numerous customer accounts at TD Ameritrade and using that authority to liquidate millions of dollars worth of securities. The Division also alleges that Otto violated the anti-fraud provisions of the Exchange Act by concealing his identity from TD Ameritrade in order to effect trades in customer accounts after TD Ameritrade had terminated his trading authority. Finally, the Division alleges that Otto violated the anti-fraud provisions of the Advisers Act by impersonating an advisory client when communicating with TD Ameritrade.

A hearing will be will be scheduled before an Administrative Law Judge to determine whether the allegations against Otto are true, to provide him with an opportunity to respond to the allegations, and to determine what, if any, remedial sanctions are appropriate and in the public interest.

The Order requires the Administrative Law Judge to issue an initial decision no later than 300 days from the date of service of the Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice. (Rels. 34-60935; IA-2944; File No. 3-13674)


George Tamura Sanctioned

George Tamura (Tamura), of Fremont, California, has been barred from association with any broker, dealer, or municipal securities dealer. The sanctions were ordered in an administrative proceeding before an administrative law judge, following a court-ordered injunction against him. In June 2009, Tamura was enjoined from violating the antifraud provisions of the federal securities laws based on his involvement in a fraudulent offering of about $20 million in Holmes Harbor Sewer District bonds to over 100 investors. Tamura, vice president of IBIS Securities, LLC (IBIS), a securities brokerage firm, assisted in selling the bonds to investors through material misstatements regarding how the bond proceeds would be used and how IBIS would be compensated. (Rel. 34-60927; File No. 3-13637)


In the Matter of Glenn Manterfield

An Administrative Law Judge has issued an Order Making Findings and Imposing Remedial Sanction by Default (Default Order) in Administrative Proceeding No. 3-13438, Glenn Manterfield. The Order Instituting Proceedings (OIP) alleged that, on April 8, 2009, the U.S. District Court for the District of Massachusetts issued a permanent injunction against Manterfield. According to the OIP, the injunction bars Manterfield from future 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 Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

The Default Order finds the allegations to be true. It concludes that, pursuant to Section 203(f) of the Investment Advisers Act of 1940, it is in the public interest to bar Manterfield from association with any investment adviser. (Rel. IA-2943; File No. 3-13438)


In the Matter of Pathnet Telecommunications, Inc.

An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default (Default Order) in Pathnet Telecommunications, Inc., Administrative Proceeding No. 3-13636. The Order Instituting Proceedings alleged that six Respondents failed repeatedly to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission. The Default Order finds these allegations to be true. It revokes the registrations of each class of registered securities of Pathnet Telecommunications, Inc., Peaches Entertainment Corp., Pet Quarters, Inc., Piccadilly Cafeterias, Inc. (n/k/a Capital City Cornichon Corp.), Pick Communications Corp., and Pipeline Technologies, Inc., pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-60930; File No. 3-13636)


In the Matter of Value Line, Inc., Value Line Securities, Inc., Jean Bernhard Buttner, and David Henigson

On Nov. 4, 2009, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b)(4), 15(b)(6) and 21C of the Securities Exchange Act of 1934, Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, and Sections 9(b) and 9(f) of the Investment Company Act of 1940 against Value Line, Inc. (Value Line), Value Line Securities, Inc. (VLS), Jean Bernhard Buttner (Buttner) and David Henigson (Henigson). The Order finds that New York City-based investment adviser, Value Line, its CEO, its former Chief Compliance Officer and its affiliated broker-dealer defrauded the Value Line family of mutual funds by funneling nearly $24 million in bogus brokerage commissions on mutual fund trades to Value Line's affiliated broker-dealer, VLS.

The Commission's Order finds that, from 1986 to November 2004, Value Line, while serving as investment adviser to the Value Line funds, directed a portion of the funds' securities trades to VLS through its so-called "commission recapture program." Value Line arranged for one of three unaffiliated brokers to execute, clear and settle the funds' trades at a discounted commission rate of $.02 to $.01 per share. Instead of passing this discount on to the funds, Value Line had the unaffiliated brokers bill the funds $.0488 per share and then "rebate" $.0288 to $.0388 per share to VLS. In total, VLS received over $24 million in bogus brokerage commissions from the funds pursuant to this scheme, as VLS did not perform any bona fide brokerage services for the funds on these trades.

Value Line falsely represented to the funds' Independent Directors/Trustees and shareholders that VLS provided bona fide brokerage services for the commissions it received and that VLS otherwise served the best interests of the funds and their shareholders. Buttner directed the "commission recapture program" and monitored its profitability to VLS, and thus to Value Line, by receiving periodic updates from Henigson, who was responsible for implementing the scheme. Buttner and Henigson were involved in structuring and negotiating the recapture arrangement with the unaffiliated rebate brokers. Through Buttner and Henigson, Value Line also made materially misleading statements and omissions about VLS and the recapture program to the funds and their shareholders in presentations to the Independent Directors/Trustees and in public filings with the Commission.

Based on the above, the Order censures Value Line, VLS, Buttner and Henigson; requires them to cease and desist from committing or causing violations and any further 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, Sections 206(1), 206(2) and 207 of the Investment Advisers Act, and Sections 15(c), 34(b) and 17(e)(1) of the Investment Company Act; bars Buttner and Henigson from association with any broker, dealer, investment adviser and investment company, and prohibits them from acting as an officer or director of any public company; orders Value Line to pay $24,168,979 in disgorgement, $9,536,786 in prejudgment interest, and a $10 million civil penalty; orders Buttner to pay a $1 million civil penalty; and orders Henigson to pay a $250,000 civil penalty. Value Line, VLS, Buttner and Henigson each consented to the issuance of the Order without admitting or denying any of the findings therein. (Rels. 33-9081; 34- 60936; IA-2945; IC-28989; File No. 3-13675)


Three Former Executives of Symbol Technologies, Inc. Settle SEC Action by Agreeing to Permanent Injunctions, Monetary Penalties and Other Relief

Former Chief Financial Officer to Pay $3.3 Million

On November 2, 2009, the United States District Court for the Eastern District of New York, Honorable Sandra J. Feuerstein, United States District Judge, entered final judgments against three defendants in the pending enforcement action against former executives of Symbol Technologies, Inc. ("Symbol"). The Commission's complaint, filed on June 3, 2004, alleges that from 1998 until early 2003, the defendants engaged in a fraudulent scheme to inflate revenue, earnings and other measures of financial performance in order to create the false appearance that Symbol had met or exceeded its financial projections. The three judgments imposed the following relief, to which each of the three defendants consented without admitting or denying the allegations of the Commission's complaint:

Kenneth Jaeggi, Symbol's Chief Financial Officer, consented to entry of a judgment that requires him to disgorge a total $3,091,539, consisting of $2,274,935 in ill-gotten gains he obtained as a result of the conduct alleged in the complaint and $816,604 in prejudgment interest, and to pay a civil penalty of $250,000. The consent judgment also prohibits him from acting as an officer or director of a public company for a five year period and permanently enjoins him from violating the relevant antifraud, corporate reporting, books and records and internal control provisions of the federal securities laws. Specifically, Jaeggi is permanently enjoined from violating, or engaging in conduct that would make him liable for violations of, Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2), and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1 and 13b2-2. The complaint alleges that Jaeggi: (i) spearheaded what was known within Symbol as the "Tango sheet" process, through which baseless accounting entries were made in order to conform the company's raw quarterly results to management's projections; (ii) engaged in channel stuffing and other revenue recognition schemes; and (iii) manipulated restructuring charges, operations reserves and inventory levels to boost reported earnings.

Christopher DeSantis, Symbol's former Vice President of Sales Finance, consented to entry of a judgment that requires him to pay a civil penalty of $40,000 (plus $1 of disgorgement), and that permanently enjoins him from violating the relevant antifraud, corporate reporting, books and records and internal control provisions of the federal securities laws. Specifically, DeSantis is permanently enjoined from violating, or engaging in conduct that would make him liable for violations of, Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1. The complaint alleges that DeSantis carried out aspects of the channel stuffing scheme and other fraudulent revenue recognition practices, as well as the manipulation of reported inventory levels and accounts receivable data to conceal the adverse side effects of the revenue recognition schemes.

James Heuschneider, Symbol's former Director of Customer Service, consented to entry of a judgment that requires him to pay a civil penalty of $35,000 and to disgorge $3,587, consisting of $2,280 in ill-gotten gains as a result of the conduct alleged in the Commission's complaint and $1,307 in prejudgment interest. The consent judgment also permanent enjoins him from violating the relevant antifraud, corporate reporting, books and records and internal control provisions of the federal securities laws. Specifically, Heuschneider is permanently enjoined from violating, or engaging in conduct that would make him liable for violations of, Sections 10(b), 13(a), 13(b)(2) and 13(b)(5), of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1. The complaint alleges that Heuschneider engaged in improper practices to overstate the customer service department's revenue and earnings.

On February 27, 2008, in a parallel criminal proceeding brought by the United States Attorney's Office for the Eastern District of New York ("USAO"), Jaeggi pled guilty to one felony count of mail fraud for filing a false disclosure form with the Commission in connection with his exercise of Symbol stock options, and he was sentenced to three years of probation and ordered to pay $450,000 in restitution. On December 16, 2005, DeSantis pled guilty to misprision of a felony in the same criminal proceeding, and on July 16, 2009 he was sentenced to three years of probation.

Final consent judgments were previously entered against Symbol and three individual defendants in the Commission's civil enforcement action, and against one additional Symbol executive in a separate action. The litigation is continuing with respect to the remaining defendants, and the Court has set a trial date of Jan. 11, 2010. [SEC v. Symbol Technologies, et al., Civil Action No. 04-2276 (SJF) (EDNY)] (LR-21277; AAE Rel. 3064)


Court Enters Permanent Injunction and Other Relief against James Treacy in Stock Options Backdating Case

The Securities and Exchange Commission (SEC) today announced that on November 3, 2009, the Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York entered a final judgment of permanent injunction and officer and director bar against James J. Treacy, the former president and Chief Operating Officer of Monster Worldwide, Inc. Without admitting or denying the SEC's allegations, Treacy consented to the entry of the final judgment. The judgment settles the SEC's claims against Treacy in a civil action filed on April 30, 2008, in which the SEC alleged that Treacy engaged in a fraudulent scheme to backdate option grants while he was an officer of Monster.

The SEC's complaint alleged that Treacy participated in a scheme that began in 1997 to fraudulently backdate stock options to coincide with the dates of low closing prices for the New York-based company's common stock. As a result of this conduct, Monster misrepresented that all stock options were granted at the fair market value of the stock on the date of the award, when that was not the case. Monster also filed materially misstated financial statements with the SEC in its Forms 10-K and 10-Q that did not recognize compensation expense for the company's stock option grants, as required by generally accepted accounting principles. As a result, Monster overstated its aggregate pre-tax operating income by approximately $339.5 million for fiscal years 1997 through 2005.

The final judgment: (i) permanently enjoins Treacy from future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), 14(a) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 13b2-2, 14a-9 and 16a-3 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder; and (ii) imposes a permanent bar from acting as an officer or director of a public company. The SEC withdrew its request for disgorgement and civil monetary penalties in light of the jail sentence, forfeiture and restitution ordered in United States v. James J. Treacy, 08 CR 0366 (JSR) (S.D.N.Y.).

For additional information about Treacy as well as other litigation associated with the backdating of stock options at Monster,, please see Litigation Release No. 21042 (May 18, 2009), Litigation Release No. 20554 (April 30, 2008) [SEC v. James J. Treacy, et al., Civil Action No. 08 CV 4052 (RJS) (S.D.N.Y.)], Litigation Release No. 20435 (Jan. 23, 2008), Litigation Release No. 20056 (March 27, 2007), and Litigation Release No. 20004 (Feb. 15, 2007). [SEC v. James J. Treacy, et al., Civil Action No. 08 CV 4052 (RJS) (S.D.N.Y.)] (LR-21278; AAE Rel. 3065)


Court Enters Judgments Against Relief Defendants NextStep Medical Staffing IL, Inc., NextStep Holdings, Inc., Spectrum Entertainment Group, Inc. and The Ilumina Group, Inc., Ordering Them to Pay Disgorgement and Prejudgment Interest.

On October 29, 2009, the Honorable Joan Lefkow of the United States District Court for the Northern District of Illinois entered default judgments against relief defendants NextStep Medical Staffing IL, Inc., NextStep Holdings, Inc., Spectrum Entertainment Group, Inc., and The Ilumina Group, Inc. In these judgments, the Court ordered each of the relief defendants to disgorge the profits obtained as a result of the conduct alleged in the complaint and to pay prejudgment interest on those amounts. The Court ordered: NextStep Medical to pay disgorgement of $3,218,517.05 together with prejudgment interest of $122,353.56, for a total of $3,340,870.61; NextStep Holdings to pay disgorgement of $886,694.86 together with prejudgment interest of $25,360.21, for a total of $912,055.07; Spectrum to pay disgorgement of $156,500.00 together with prejudgment interest of $2,091.89, for a total of $158,591.89; and Ilumina to pay disgorgement of $271,700.00 together with prejudgment interest of $6,616.00, for a total of $278,316.00.

The SEC's complaint alleges that between at least February 2008 and the present, David J. Hernandez, a Downers Grove, Illinois resident and convicted felon, solicited investors to purchase "guaranteed investment contracts" by making false and misleading statements about his background, the existence of the company that issued the investments, the uses of investor proceeds and the safety of the investments. The complaint alleges that Hernandez, also doing business as "NextStep Financial Services, Inc.," sold the "guaranteed investment contracts" in person and through NextStep Financial's website and claimed that he had an extensive background in banking and business, including having business and law degrees, and that NextStep Financial was a successful company that invested in payday advance stores. The complaint further alleges that Hernandez told investors that their investments were safe because they were covered by insurance. According to the complaint, however, Hernandez never received the claimed degrees, his "banking experience" included a prior federal conviction for wire fraud and NextStep Financial was a defunct corporation with no financial services operations other than running this scheme. In addition, the complaint alleges that Hernandez never invested in the payday advance stores or purchased the insurance that covered investors' funds and instead used the majority of the investors' funds to pay existing investors their promised returns and diverted the remaining funds into his other business ventures, including relief defendants NextStep Medical, NextStep Holdings, Spectrum and Ilumina, and for his and his wife's personal benefit.

The SEC’s civil action against Hernandez and Relief Defendant Gina Hernandez remains pending. [SEC v. David J. Hernandez and Relief Defendants NextStep Medical Staffing IL, Inc., NextStep Holdings, Inc., Spectrum Entertainment Group, Inc., The Ilumina Group, Inc., and Gina M. Hernandez, Civil Action No. 09-cv-3587(N.D. Ill.)] (LR-21279)


SEC Charges Two Former Directors of J.P. Morgan Securities With Fraud in Connection With Unlawful Payment Scheme to Obtain Municipal Bond and Swap Business

The Securities and Exchange Commission today charged Charles E. LeCroy and Douglas W. MacFaddin, two former directors of J.P. Morgan Securities Inc. with fraud in connection with an unlawful payment scheme which allowed J.P. Morgan Securities to obtain $5 billion in Jefferson County, Alabama municipal bond offerings and swap agreement transactions.

The SEC complaint, filed in the U.S. District Court for the Northern District of Alabama, alleges that between October 2002 and November 2003, LeCroy and MacFaddin directed over $8 million in payments from J.P. Morgan Securities to close friends of Jefferson County commissioners (County commissioners) who either owned or worked at local broker-dealers. These broker-dealers had no official role and performed few, if any, services on the transactions. In connection with these payments, according to the SEC's complaint, the County commissioners voted to select J.P. Morgan Securities as managing underwriter and swap provider for the largest municipal auction rate securities and swap agreement transactions in J.P. Morgan Securities' history.

According to the SEC's complaint, although labeled as payments for work on the transactions, LeCroy and MacFaddin knew that these were sham transactions designed to ensure that County officials selected J.P. Morgan Securities. LeCroy and MacFaddin referred to the payments in taped telephone conversations as "payoffs," "the price of doing business" or "giving away free money." J.P. Morgan Securities incorporated the costs of these unlawful payments by charging Jefferson County higher interest rates on the swap transactions.

The SEC further alleges that LeCroy and MacFaddin failed to disclose any of these payments, and the inherent conflicts of interest raised by the payments, either to the County or investors in bond offerings, or to the County in the swap agreements at issue. This conduct deprived Jefferson County and its investors of objective and impartial bond underwriting processes and swap agreement negotiations.

The SEC's complaint charges LeCroy and MacFaddin with violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15B(c)(1) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Municipal Securities Rulemaking Board Rules G-17 and G-20. The SEC's complaint seeks judgments against each defendant providing for permanent injunctions and disgorgement with prejudgment interest.

In April 2008, the SEC filed a civil action in the U.S. District Court for the Northern District of Alabama against Birmingham, Alabama Mayor Larry Langford (the former president of the Jefferson County commission); William B. Blount, chairman of Blount Parrish & Co, Inc., a broker-dealer based in Montgomery, Alabama; and registered lobbyist Albert LaPierre. The SEC's complaint alleged that while Langford served as president of the County Commission, he accepted more than $156,000 in undisclosed cash and benefits over the course of two years from Blount in exchange for Blount Parrish participating in every Jefferson County municipal bond offering and security-based swap agreement transaction during 2003 and 2004. Securities and Exchange Commission v. Larry P. Langford, William B. Blount, Blount Parrish & Co., Inc., and Albert W. LaPierre, Case No. Case No. cv-08-B-0761-S (N.D. Ala., filed April 30, 2008). This case was the SEC's first enforcement action involving security-based swap agreements.

On December 1, 2008, the United States Attorney for the Northern District of Alabama filed criminal charges against Langford, Blount and LaPierre. The 101-count indictment charged Langford, Blount, and LaPierre with, among other charges, conspiracy, bribery, and money laundering in an alleged long-running bribery scheme related to Jefferson County bond transactions and swap agreements. United States of America v. Larry P. Langford, William B. Blount, and Albert W. LaPierre, (United States District Court for the Northern District of Alabama, Case No. 2:08-CR-00245-LSC-PWG). On July 30, 2009, LaPierre pled guilty to the charges of conspiracy and filing a false tax return, and agreed to forfeit $371,932 and pay back taxes. On August 18, 2009, Blount pled guilty to conspiracy and bribery and agreed to forfeit $1,000,000. On October 28, 2009, Langford was found guilty on 60 counts of bribery, mail fraud, wire fraud and tax evasion. All three currently await sentencing.

For further information see Litigation Release Nos. 20400 (Dec. 17, 2007), 20545 (April 30, 2008), 20821 (Dec. 5, 2008). [SEC v. Charles E. LeCroy, and Douglas W. MacFaddin, Case No. cv-09 U/B 2238-S (N.D. Ala.)] (LR-21280)


SEC Settles With Former CFO of Lantronix, Inc.

On September 29, 2009, the Honorable Andrew Guilford, United States District Judge for the Central District of California, entered a Final Judgment against Steven V. Cotton, pursuant to Cotton's Consent. Cotton is the former chief financial officer and chief operating officer of Lantronix, Inc., an Irvine, California technology company. Cotton consented to entry of a permanent injunction, disgorgement of $344,976.98 in ill-gotten gains plus pre-judgment interest of $62,629.03, payment of a $120,000 civil penalty, and imposition of a ten-year officer and director bar.

The Commission's complaint, filed in U.S. District Court in Los Angeles, California, alleged that Cotton, of Huntington Beach, California, orchestrated a scheme to inflate the company's revenues and earnings by deliberately sending excessive product to distributors and granting them undisclosed expanded return rights and unusual extended payment terms (a fraudulent practice known as "channel stuffing"). The complaint further alleged that, as part of the channel stuffing scheme and to prevent imminent product returns, Cotton caused Lantronix to loan funds to a third party to purchase Lantronix product from one of its distributors. According to the complaint, Lantronix, through Cotton, also engaged in other improper revenue recognition practices, including shipping product that had not been ordered and recognizing revenue on a contingent sale.

The complaint alleged that as a result of Cotton's scheme, Lantronix overstated its revenues by up to 21 percent and understated pre-tax losses by up to 98 percent for its second and third quarters of fiscal year 2001, its fiscal year 2001, and the first quarter of fiscal 2002. Lantronix publicly reported its false financials in periodic reports on Form 10-Q and 10-K and in a registration statement for a public offering of stock in July 2001. Lantronix subsequently restated its financial results for the relevant periods.

The complaint further alleged that Cotton made substantial profits from his scheme through bonuses and through the sale of Lantronix stock at artificially inflated prices.

The Commission alleged Cotton violated the antifraud provisions, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; the record-keeping and internal controls provisions, Section 13(b)(5) of the Exchange Act and Rule 13b2-1; and the false statements to auditors provision, Rule 13b2-2 of the Exchange Act. Cotton was also alleged to have aided and abetted Lantronix's violations of the reporting provisions, Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; the record-keeping provision, Section 13(b)(2)(A) of the Exchange Act; and the internal controls provision, Section 13(b)(2)(B) of the Exchange Act.

For further information see LR-19850, AAER No. 2487 (September 28, 2006); Securities Act Release No. 8745, Exchange Act Release No. 54525, AAER No. 2485 (Sept. 27, 2006); and LR-17799 (Oct. 23, 2002). [SEC v. Steven V. Cotton, United States District Court for the Central District of California, Civil Action No. SA CV-06-905 AG (ANx)] (LR-21281; AAE Rel. 3066)


SEC Charges Merge Healthcare Incorporated, Richard Linden, and Scott Veech in Connection With Accounting Fraud

On Nov. 4, 2009, the Commission charged Richard Linden of Barrington, Illinois, Scott Veech of Whitefish Bay, Wisconsin, and Merge Healthcare Incorporated, based in Milwaukee, Wisconsin, in connection with an accounting fraud that occurred from 2002 through 2005. Linden was the former Chief Executive Officer of Merge, a company which provides medical imaging software, hardware, and services, and Veech was its Chief Financial Officer.

The SEC's complaint, filed in federal court in Milwaukee, alleges that Linden and Veech helped cause fraudulent accounting practices at Merge which involved the improper recognition of revenue from sales on transactions: (1) which included promises of specified future software enhancements; (2) which included sale contingencies; and (3) in which Merge failed to properly execute contracts and/or failed to properly deliver products in the same fiscal period in which Merge recorded revenue from those transactions. The SEC's complaint also alleges that Linden interfered with the audit confirmation process between certain of Merge's customers and Merge's outside auditor by instructing, or causing others to instruct, some of Merge's customers not to disclose side agreements between Merge and the customer. The SEC also alleges that Merge failed to devise and maintain a system of internal accounting controls that could have prevented the fraud. The Commission's complaint also alleges that during the period February through August 2006, during which Merge disclosed its accounting misstatements to the public, Merge's stock price dropped from $24.50 to $7.30 per share, reflecting a $500 million loss in market capitalization.

Merge, Linden, and Veech settled the charges without admitting or denying the allegations of the SEC's complaint. Under the settlement, Linden and Veech are permanently enjoined from committing future violations of the antifraud provisions of the federal securities laws and are barred from serving as an officer and director of a public company for five years. Additionally, Linden will pay $382,193 in disgorgement, $117,807 in prejudgment interest, and a penalty of $90,000, and Veech will pay $180,000 in disgorgement, $50,000 in prejudgment interest, and a $50,000 penalty. Veech also consented to the entry of an administrative order which suspends him from appearing or practicing before the Commission as an accountant, with a right to reapply after three years. Merge is permanently enjoined from future violations of the internal controls, books and records, and reporting provisions of the federal securities laws. [SEC v. Merge Healthcare Incorporated, Richard Linden, and Scott Veech, Civil Case No. 1:09-cv-1036, USDC, E.D.Wis.] (LR-21282; AAE Rel. 3067)


SECURITIES ACT REGISTRATIONS


RECENT 8K FILINGS

 

http://www.sec.gov/news/digest/2009/dig110409.htm


Modified: 11/04/2009