SEC and CFTC Issue Joint Orders on Volatility Indexes and Security Futures
The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued two joint orders related to security-based futures contracts that clarify each Commission's respective jurisdiction and allow additional products to underlie security futures.
The first joint order excludes certain foreign and domestic volatility indexes that are based on broad-based security indexes from the definition of "narrow-based security index". As a result of the joint order, futures on foreign and domestic volatility indexes that meet the criteria contained in the joint order are treated as "broad-based security indexes" and subject to the exclusive jurisdiction of the CFTC. Options on such volatility indexes are subject to the federal securities laws and the jurisdiction of the SEC. The joint order, contained in SEC Release No. 34-61020, became effective on November 17.
The second joint order allows security futures products to be based on any security that is eligible to underlie an exchange-listed security option, including certain unregistered debt securities. This joint order, which is contained in SEC Release No. 34-61027, became effective on November 19. (Press Rel. 2009-252)
RULES AND RELATED MATTERS
Joint Order Under the Securities Exchange Act of 1934 and the Commodity Exchange Act
Pursuant to Section 6(h)(4)(A) of the Securities Exchange Act of 1934 (Exchange Act) and Section 2(a)(1)(D)(v)(I) of the Commodity Exchange Act (CEA), the Securities and Exchange Commission and the Commodity Futures Trading Commission jointly modified the security future listing standard requirements in the Exchange Act and the CEA to permit any security that is eligible to underlie options traded on a national securities exchange to also underlie security futures, and to permit unregistered debt securities to underlie security futures. Publication is expected in the Federal Register during the week of November 23. (Rel. 34-61027)
In the Matter of Mosaic Nutraceuticals Corp. (f/k/a Mosaic Nutriceuticals Corp.) and Charles T. Townsend
On November 20, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 21C and 12(j) of the Securities Exchange Act of 1934, Making Findings, Imposing a Cease-and-Desist Order, and Revoking Registration of Securities (Order) against Mosaic Nutraceuticals Corp. (f/k/a Mosaic Nutriceuticals Corp.) and Charles T. Townsend.
The Order finds that Mosaic and its President, Charles T. Townsend, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities. The Order finds that between July 13, 2004 and Nov. 17, 2004, Mosaic and Townsend issued three false and misleading press releases that announced that Mosaic intended to support the launch of its nutraceutical products with a multi-million dollar advertising and public relations campaign. However, when Mosaic issued each of these three press releases, Mosaic had no money, no bank accounts, no business plan, no plan to borrow funds from a bank or other financial institution, and no funds to finance such a campaign or even to pay to manufacture its products.
Based on the above conduct, the Order revokes the registration of each class of Mosaic's securities and orders Mosaic and Townsend to cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Mosaic and Townsend consented to the issuance of the Order without admitting or denying any of the findings contained therein except for the Commission's jurisdiction over them and the subject matter of the proceedings, which are admitted. (Rel. 34-61038; File No. 3-13691)
Commission Sanctions Joseph John VanCook for Violations of the Antifraud and Recordkeeping Provisions of the Securities Laws
The Commission has found that Joseph John VanCook, a former salesperson and partial owner of Pritchard Capital Partners, LLC, a registered broker-dealer, willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 by orchestrating a fraudulent scheme involving "late trading" of mutual fund shares, i.e., "the unlawful practice of permitting mutual fund orders received after the 4:00 p.m. [fund share] pricing time to receive the [net asset value, or "NAV"] calculated at or as of 4:00 p.m. that day, instead of 4:00 p.m. the following trading day." The Commission found that VanCook accepted and recorded orders to trade mutual fund shares from clients before 4:00 p.m. but permitted three hedge fund clients to change or cancel those orders after the markets closed at 4:00 p.m. without recording the time at which they made those final trading decisions. The Commission found that, in submitting those orders to his firm's clearing broker, VanCook created "the false impression that final orders associated with [those] accounts were placed before 4:00 p.m. and were therefore entitled to that day's NAV when in fact they were not."
The Commission concluded that, as a result of VanCook's scheme, his "late-trading clients obtained an undisclosed advantage, at the expense of other shareholders of the relevant mutual funds, when they learned of market-moving information and were able to buy, exchange, or sell mutual fund shares at NAVs set before the market-moving information was released. The mutual funds at issue were deceived into providing improper prices for those orders contrary to their prospectus language and transmitting and effecting orders contrary to their published policies and procedures, as well as applicable rules and regulations, thereby harming or causing the risk of harm to shareholders who made investment decisions premised upon improper prices and suffered dilution to the value of their shares." The Commission also found that VanCook aided and abetted and willfully caused the Firm to violate Exchange Act Section 17(a)(1) and Exchange Act Rule 17a-3(a)(6) by failing to make and keep current certain books and records in that he established the order-taking system by which the time of receipt of his late-trading clients' final trade decisions was not recorded.
For these violations, which the Commission noted involved "nearly 5,000 late mutual fund orders effecting the purchase and sale of billions of dollars' worth of mutual fund shares," VanCook was barred from association with any broker or dealer and ordered to cease and desist from committing future violations of the antifraud provisions, to pay disgorgement plus prejudgment interest, and to pay a civil money penalty. (Rel. 34-61039A; File No. 3-12753)
In the Matter of Pacific Lease Group, Inc.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registration by Default (Default Order) in Pacific Lease Group, Inc., Administrative Proceeding No. 3-13621. The Order Instituting Proceedings (OIP) alleged that Pacific Lease Group, Inc., failed to file a required annual report for its fiscal year ended Dec. 31, 2008, and quarterly reports since the fiscal quarter ended Sept. 30, 2007. The OIP further alleged that the company failed to make required disclosures in its annual report for fiscal year ended Dec. 31, 2007, concerning its internal control over financial reporting and disclosure controls and procedures, while its securities were registered with the Securities and Exchange Commission. The Default Order finds these allegations to be true and revokes the registration of each class of registered securities of Pacific Lease Group, Inc., pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-61040; File No. 3-13621)
Commission Orders Hearings on Registration Revocation Against Eleven Public Companies for Failure to Make Required Periodic Filings
The Commission today instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registration of each class of the securities of eleven companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the eleven issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of the securities of these respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-61044; File No. 3-13692)
SEC Charges Two Individuals With Illegal Insider Trading in Advance of Negative News
On November 19, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Nevada against R. Brooke Dunn, a former executive at Shuffle Master, Inc., and Nicholas P. Howey for illegal insider trading in Shuffle Master stock and options prior to an announcement of disappointing financial results by Shuffle Master.
The SEC's Complaint alleges that, on Feb. 26, 2007, after he first learned that Shuffle Master would announce disappointing preliminary financial results, Dunn called Howey and provided him with material nonpublic information relating to Shuffle Master's anticipated announcement. Howey then immediately sold all of his previously-purchased Shuffle Master stock and calls and purchased Shuffle Master puts. The next day, after Shuffle Master announced its disappointing financial news, Howey sold all of the Shuffle Master puts he purchased the previous day. Through the foregoing transactions, Howey profited by (or avoided losses of) approximately $237,000.
The Complaint charges Dunn and Howey with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks permanent injunctions, disgorgement of illegal trading profits, prejudgment interest, and civil penalties. The Complaint also seeks an order barring Dunn from serving as an officer or director of a public company. [SEC v. R. Brooke Dunn and Nicholas P. Howey, Civil Action No. 09-cv-2213 USDC, D. Nev.] (LR-21308)
SEC v. Khaled Mohammed Sharif Al Sayed Al Hashemi
By order dated Nov.19, 2009, the Honorable Harold Baer, Jr. of the United States District Court for the Southern District of New York vacated the Final Judgment entered by the Court on Nov. 18, 2009, and scheduled a conference for Dec. 1, 2009. [SEC v. Khaled Mohammed Sharif Al Sayed Al Hashemi a.k.a Khaled Al Hashemi, Civil Action No. 09-CV-6650 (S.D.N.Y.) (HB)] (LR-21309)
ADDITIONS AND CORRECTIONS
A summary in the November 16th issue of the Digest should have appeared as follows, correcting the December date:
Court Enters Judgment of Permanent Injunction and Other Relief Against Defendant George L. Theodule
The Commission announced that on Oct. 22, 2009, the United States District Court for the Southern District of Florida entered a Judgment of Permanent Injunction and Other Relief against Defendant George L. Theodule. The Judgment, entered by consent, enjoins Theodule from violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Judgment also orders Theodule to pay disgorgement with prejudgment interest and a civil penalty in amounts to be determined by the Court upon the Commission's motion.
The Commission commenced this action by filing its Complaint on Dec. 29, 2008, against Theodule and his two companies, Creative Capital Consortium, LLC and A Creative Capital Concept$, LLC. The Complaint alleges violations of the antifraud provisions of the federal securities laws in connection with a Ponzi scheme through which the defendants raised at least $23.4 million from thousands of investors in the Haitian-American Community nationwide. [SEC v. Creative Capital Consortium, LLC, et al., Case No. 08-81565-CIV-Hurley/Hopkins (S.D. Fla.)] (LR-21297)
Proposed Rule Changes
International Securities Exchange filed a proposed rule change (SR-ISE-2009-90) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder relating to changes to the U.S. Exchange Holdings, Inc. corporate documents and International Securities Exchange Trust Agreement in connection with the Form 1 applications of EDGA Exchange, Inc. and EDGX Exchange, Inc. Publication is expected in the Federal Register during the week of November 23. (Rel. 34-61005)
Financial Industry Regulatory Authority filed a proposed rule change under Rule 19b-4 (SR-FINRA-2009-076) to amend the FINRA Rule 9550 series (Expedited Proceedings). Publication is expected in the Federal Register during the week of November 23. (Rel. 34-61026)
Immediate Effectiveness of Proposed Rule Change
The Commission issued notice of filing and immediate effectiveness of a proposed rule change (SR-NYSEArca-2009-102) filed by NYSE Arca under Rule 19b-4 of the Securities Exchange Act of 1934 Amending Rule 7.25. Publication is expected in the Federal Register during the week of November 23. (Rel. 34-61025)
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